NOWLEDGEK OBJECTIVES

Studying this chapter should provide you with the strategic management knowledge needed to:

1.pursue international diversification.Explain traditional and emerging motives for firms to

2.international business-level strategies.Explore the four factors that lead to a basis for

3.strategies: multidomestic, global, and transnational.Define the three international corporate-level

4.

and regionalization.international strategy, especially liability of foreignnessDiscuss the environmental trends affecting

5.entering international markets.Name and describe the five alternative modes for

6.firm returns and innovation.Explain the effects of international diversification on

7.diversification.Name and describe two major risks of international

8.expansion are limited.Explain why the positive outcomes from international

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lost out to Chevron.attempted to take over Unocal Corp. butOffshore Oil Corp. (CNOOC), whichFu Chengyu, chairman of China National

Chinese Firms’ Incentives for Foreign Acquisitions

I

bid that was ultimately successful, even though

merge at $16.5 billion. Chevron offered a counter

Chevron and Unocal had agreed for the firms to

to take over Unocal Corp. for $18.5 billion after

ducer of oil and natural gas in China, made a bid

Offshore Oil Corporation (CNOOC), a large pro-

through the Maytag brand.The China National

order to build its presence in the United States

purchase Maytag Corporation for $1.3 billion in

appliance manufacturer in China, proposed to

Also in 2005, the Haier Group, the largest

in the United States.

the IBM label for five years as it builds its brand

deal closed in 2005, Lenovo was allowed to use

ment increased to $3 billion in 2004.When the

With this bid, the Chinese foreign direct invest-

China, proposed to acquire the PC assets of IBM.

largest personal computer manufacturer in

Alcatel SA. In December 2004, Lenovo Group, the

the mobile handset operations of France’s

tions of France’s Thomson SA (RCA brand) and

manufacturer, purchased the television opera-

assets. In early 2004,TCL Corp., a large television

dramatically increased bidding for foreign

In 2004 and into 2005, Chinese companies

local hires.

follow government policies and make better

more fully to the culture in learning to

economy and cultures, the firm has adapted

Although it had difficulty adjusting to the local

business in Latin America for over six years.

has been making acquisitions and doing

telecommunications and network equipment,

Technologies Company, China’s largest maker of

adapting to the local environment. Huwei

learned from Shougang’s mistakes and are

increased. Other Chinese companies have

the community, in part because mine safety

key positions alienated Peruvian workers and

the firm’s practices such as not hiring locals for

ing significant disappointment. Furthermore,

promises to invest to grow the operation, creat-

in 1993. However, Shougang did not fulfill its

purchased a state-run ironworks, Hierro de Peru,

International Trade and Engineering Company

A pioneer in such investments, Shougang

at times.

to South American countries has been difficult

However, the adjustment of Chinese companies

America’s abundant supply of commodity assets.

by Chinese firms.This is primarily due to South

$899 million of the $1.8 billion invested abroad

first 11 months of 2004, South America garnered

Chinese foreign investment in 2004.Through the

and the rest of Asia as the top destination for

acquisitions. South America topped Hong Kong

businesses have been searching the world for

With this encouragement many Chinese

the potential to reduce the trade surplus.

produced by Chinese firms in other nations have

trade imbalance by buying assets overseas. Goods

encouraging Chinese companies to reduce the

government can reduce this pressure is by

businesses in China. One way the Chinese

reduce the competitive position of export-related

the value of its currency, the yuan, which would

governments have pressured China to increase

Because of this trade imbalance, other

foreign countries, including the United States.

from China’s trade surplus with businesses in

$609.9 billion by year end.These reserves result

and yen—increased $200 billion to reach

different hard currencies such as the dollar, euro,

of the Chinese government that are held in

n 2004, China’s foreign-exchange reserves—assets declined and the number of fatal accidents

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exploit core competencies by diversifying into global markets. In addition, we discussfied. This chapter examines opportunities facing firms as they seek to develop andkets, both opportunities and threats for firms competing in global markets are exempli-

As foreign firms enter China and as Chinese firms enter into other foreign mar-China is astounding.capacity (for instance, in the auto industry), the potential global market power ofand overall demand for steel as China builds up its infrastructure and manufacturingup capacity. As indicated by the overall capacity of Chinese firms in the steel industry

Domestic firms are becoming more competitive and buildingfor the assets invested.estment because it provides better protectionchoose direct investment over indirect inv

ing advantage of the size of its market with its foreign direct investment. Many firmsworld. Despite its underdeveloped market and institutional environment, China is tak-only to China and its trading partners but also to industries and firms throughout theChina’s entrance into the World Trade Organization (WTO) has brought change notmarkets through foreign direct investment by acquisitions and other modes of entry.to high levels of foreign reserves from a $600 billion trade surplus by entering otherAs the Opening Case indicates, China’s firms are exercising their financial muscle due

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and worldwide competition.

through the implementation of global strategies

influence Chinese firms and industries are having

and financial power evolving in China and the

prices.This is another example of the industrial

outpace global demand and thus drive down

Brazil building capacity to the extent that it will

Industry observers worry about both China and

21.6, 10, 8, 7, 6, and 4 tons of steel, respectively.

Handan Iron and Steel Group—annually produce

Group, Magang Group, Shougang Group, and

Iron and Steel Group,Wuhan Iron and Steel

producers—Shanghai Baosteel Group, Anshan

reach 310 million tons in 2005. Six major

worldwide. Demand in China is expected to

last year, approximately one third of all steel used

capacity. China consumed about 258 million tons

300 million tons as Chinese firms build up their

In 2005 the output is expected to exceed

production.

approximately 25 percent of the world’s total

United States, Japan, and Russia combined,

about the same amount of steel produced in the

273 million tons of crude steel in 2004.This is

tons of steel per year—Chinese mills turned out

ity to produce approximately 60 million metric

which, as described in Chapter 7, has the capac-

belongs to Netherlands-based Mittal Steel,

largest steel firm in the world—that honor

industry. Although China does not have the

invested domestically and abroad in the steel

These foreign reserves are also being

reserves incentive.

entry, in part due to the excessive foreign

incentive of Chinese firms to engage in foreign

successfully completed, they demonstrate the

Haier and the CNOOC transactions were not

it was lower than the CNOOC bid. Although the

February 9, 84–87.Fortune,C. Chandler, 2004, TV’s Mr. Big,www.usatoday.com, June 21;USA Today,March, 61–65; E. B. Smith, 2005, Chinese snap up brand-name U.S. firms,Electronic Business,Branded in China,

April 20, A1, A13; D. Normile, 2005,Wall Street Journal,A18; S. Moffett & C. Hulzler, 2005, Protests in China against Japan reflect regional power struggle,January 11,Wall Street Journal,N. P. Wonacott, & Q. Haixu, 2005, For China, a cautionary tale; Insularity, unfamiliar ways strain investments in South America,

www.nytimes.com, July 6; J. Millman,New York Times,July 3, D3; S. Lohr, 2005, The big tug of war over Unocal,Arizona Republic,demand booming,www.nytimes.com, June 27; E. Kurtenbach, 2005, Steel heating up in China; Industry,New York Times,2005, China’s costly quest for energy control,

January 12, A2; J. Kahn,Wall Street Journal,A. Browne, O. Brown, S. Yang, & V. Ruan, 2005, China’s reserves of foreign money surged last year,Sources:

competencies are explored in this chapter.and capabilities that result in strategies, and the modes of entry that are based on corecompetitiveness. The relationships among international opportunities, the resources

Figure 8.1 provides an overview of the various choices and outcomes of strategicwith operations in multiple countries.cal and economic risks and the problems of managing a complex international firminnovation, and produce above-average returns. These benefits are tempered by politi-

life cycles, provide incentives for moreinternational diversification can extend product tional partners, acquiring a foreign-based firm, or establishing a new subsidiary. Suchtions, licensing some of its products or services, forming joint ventures with interna-markets. It may enter international markets by exporting from domestic-based opera-

and choose a mode of entry into internationalinternationally, it must select its strategy chapter focuses on the incentives to internationalize. Once a firm decides to competetional strategy as a source of strategic competitiveness and above-average returns. The

In this chapter, as illustrated in Figure 1.1, we discuss the importance of interna-new potential drugs.markets and invest in all areas of the world in order to learn about new markets andevident in the pharmaceuticals industry as firms compete against each other in globalers, customers, and partners, and then learn from these relationships. Such activity is

As firms move into international markets, they develop relationships with suppli-effective.of operating with little cultural diversity and without global sourcing are no longer

Especially in regard to managing human resources, traditional meansglobal mind-sets.Furthermore, to mold their firms into truly global companies, managers must developformulate a successful strategy to take advantage of these global opportunities.businesses into the international arena. A business that plans to operate globally mustdistances all pose barriers to entry into many markets, significant opportunities draw

Although national boundaries, cultural differences, and geographicaltional strategy.different problems, complexities, and threats that might accompany a firm’s interna-

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Opportunities and Outcomes of International StrategyFIGURE 8.1

Identify InternationalOpportunities

Explore Resourcesand Capabilities

InternationalStrategies

Use CoreCompetence

Modes of Entry

Increasedmarket size

Return oninvestment

Economies of scaleand learning

Locationadvantages

StrategicCompetitiveness

Outcomes

Internationalbusiness-level strategy

Multidomesticstrategy

Global strategy

Transnationalstrategy

Exporting

Licensing

Strategicalliances

Acquisitions

New whollyowned subsidiary

Managementproblems andrisk

Betterperformance

Innovation

Managementproblems andrisk

Identifying International Opportunities:/

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Incentives to Use an International Strategy

232

outside its domestic market.firm sells its goods or servicesa strategy through which the

international strategyAn

However, the uniqueness of emergingreduce the risk of devaluation in one country.tribute their operations across many countries, including emerging ones, in order to

Because of currency fluctuations, firms may also choose to dis-products and services.internationalization incentive because of their high potential demand for consumer

New large-scale, emerging markets, such as China and India, provide a strongdomestic market.and development expertise for an emerging business start-up may not exist in theachieved by purchasing from the lowest-cost global suppliers. For instance, research

There is also pressure for cost reductions,tions in the United States and elsewhere.certainly found this to be true; accordingly, they have sought to enhance their opera-than that needed to meet domestic market demand. Hyundai, a Korean car maker,scale necessary to reduce costs to the lowest level often require an investment greater

In some industries, technology drives globalization because the economies ofunits and has facilitated the development of the global brand.This arrangement has allowed for easier shipping and handling than fully assembled

mbled by the consumer after purchase.chisees. It generated $15.5 billion in sales in 2004. All of its furniture is sold in compo-furniture in 44 countries through 224 stores that it owns and operates through fran-

IKEA, for example, has become a global brand by sellinglifestyles in different cultures.media also facilitate the ability of people in different countries to visualize and modeldue to similarities in lifestyle in developed nations. Increases in global communicationsimilar. This “nationless,” or borderless, demand for globally branded products may be

and commodities appears to become moreindustrialize, the demand for some products integration of operations, mostly driven by more universal product demand. As nationsinternational expansion (see Chapter 1). For instance, pressure has increased for a global

Although these traditional motives persist, other emerging motivations also driveproduction costs.ers, have moved portions of their operations to foreign locations in pursuit of lowerreserves. Other industries, such as clothing, electronics, watchmaking, and many oth-tire firms need rubber, and oil companies scour the world to find new petroleumof Unocal by CNOOC. For instance, aluminum producers need a supply of bauxite,

Opening Case by the proposed acquisitiontant in some industries, as illustrated in the resources. Key supplies of raw material—especially minerals and energy—are impor-

Another traditional motive for firms to become multinational is to secure neededextend a product’s life cycle.

ms pursue international diversification is totherefore, observed that one reason why firVernon,operations by moving production to a region with low manufacturing costs.

increasing demand. As the product becomes standardized, the firm may rationalize itsproduction capacity abroad, especially because foreign competitors also organize to meetoperations. Increased demand in foreign countries justifies direct foreign investment inthe product may then develop in other countries, and exports are provided by domesticespecially in an advanced economy such as that of the United States. Some demand forHe suggested that typically a firm discovers an innovation in its home-country market,

Raymond Vernon captured the classic rationale for international diversification.national markets yield potential new opportunities.tional strategy (as opposed to a strategy focused on the domestic market) is that inter-

One of the primary reasons for implementing an interna-outside its domestic market.is a strategy through which the firm sells its goods or servicesinternational strategyAn

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instance, Heineken NV has purchased a Russian brewer, Patra, increasing Heineken’sacquiring other brewers, both in developed markets and in emerging economies. Fordomestic markets. Accordingly, most large global brewers have pursued a strategy ofFor example, firms in the beer industry lack significant growth opportunities in theiroption to firms competing in domestic markets that have limited growth opportunities.traditions is not simple, following an international strategy is a particularly attractive

Although changing consumer tastes and practices linked to cultural values orforeign-owned venture operation in China.”the Chinese market and the remaining firms (15.4 percent) established a 100 percenta joint venture entry operation with a local Chinese partner as their entry mode forsampled 117 pharmaceutical firms found that “ninety-nine firms (84.6 percent) choseforeign direct investment into China due to the size of the market. One researcher whomoving into international markets. Pharmaceutical firms have been doing significantFirms can expand the size of their potential market—sometimes dramatically—by

Increased Market Size

) and their managerial challenges.influencescoordination expenses and limited access to knowledge about host country politicalor customers). We examine these benefits in terms of both their costs (such as higheradvantage through location (for example, access to low-cost labor, critical resources,and processes; (3) greater economies of scale, scope, or learning; and (4) a competitivesize; (2) greater returns on major capital investments or on investments in new productsthese strategies are successful, firms can derive four basic benefits: (1) increased market

We’ve discussed incentives that influence firms to use international strategies. Wheneconomies of scale.increase the need for local investment and responsiveness as opposed to seeking globalcentage of procurements, manufacturing, and R&D to use local sources.

governments frequently require a high per-the foreign firm to avoid tariffs. Also, host joint ownership with a local company in order to invest in local operations, which allowsbecause of employment contract differences. In many cases, host governments demandFor example, it is more difficult to lay off employees in Europe than in the United States

Employment contracts and labor forces differ significantly in international markets.industry.economies of scale, as in the white goods (e.g., home appliances, such as refrigerators)This localization may affect even industries that are seen as needing more globalbe responsive to local country conditions through its internationalization strategy.

The need for local repair and service capabilities, for example, influence a firm toent product.because of cultural differences or effective marketing to entice customers to try a differ-

e goods or services require customizationnational, or regional customs, especially wherEurope, as elsewhere, need to understand the pressure on them to respond to local,

Companies seeking to internationalize their operations inmarket are invested.markets, where 60 percent of U.S. firms’ assets that are located outside the domestic

A large majority of U.S.-based companies’ international business is in Europeanand political risks.competitive paradigms that emphasize the skills needed to manage financial, economic,between China and India and Western countries pose serious challenges to Western

However, the differencesbecoming more supportive of foreign direct investment.of its economic system, it also offers a huge potential market and its government isfrom Western countries in many respects, including culture, politics, and the precepts

While India, for example, differsmarkets presents both opportunities and challenges.18

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ucts across country borders and use the same or similar production facilities, therebyin their manufacturing operations. To the extent that a firm can standardize its prod-By expanding their markets, firms may be able to enjoy economies of scale, particularly

Economies of Scale and Learning

up from $0.8 billion in the 2002–2004 period.Mideast. Turkey was expected to draw $6 billion of foreign direct investment in 2005,Companies are noticing its fairly large market and entry point for other markets in thenificant growth since 2001 due to foreign direct investment and better management.

Turkey, for example, has experienced sig-whether to invest in international markets.different countries have different expectations and use different criteria to decidetional markets is to generate above-average returns on investments. Still, firms from

Regardless of other issues, however, the primary reason for investing in interna-investments and large-scale R&D expenditures.firms, because they expand the opportunity for the firm to recoup significant capitaltional expansion are particularly attractive in many industries such as pharmaceuticalopment costs even more rapidly. Consequently, the larger markets provided by interna-imitate the new technology relatively quickly, firms need to recoup new product devel-learn the new technology, and develop a similar product. Because their competitors canmore likely. Through reverse engineering, competitors are able to take apart a product,because of different patent laws across country borders, imitation by competitors ismore quickly. Moreover, firms’ abilities to develop new technologies are expanding, anducts become obsolete more rapidly, and therefore investments need to be recoupedinvestment in R&D, the development pace for new technology is increasing. New prod-electronics are international. In addition to the need for a large market to recoup heavyplant and capital equipment or R&D. Therefore, most R&D-intensive industries such asLarge markets may be crucial for earning a return on significant investments, such as

Return on Investment

opposed to market-seeking motives.in international R&D opportunities for resource development and learning purposes as

Research suggests that German multinationals are increasingly investingR&D activities.entific knowledge and talent to produce value-creating products and processes from their

to invest more heavily in those countries with the sci-a firm’s foreign R&D investments. Most firms preferscience base in the country in question also can affectless risk for a firm’s investments. The strength of theusually offer higher potential returns and thus pose

Larger marketstitive advantages in that market.firm’s willingness to invest in R&D to build compe-

The size of an international market also affects a34.2 percent and 14.2 percent, respectively.brewer InBevsa (formerly Interbrew SA), which havebased Scottish and Newcastle PLC) and BelgianCopenhagen-based Carlsberg AS and Edinburgh-Baltic Beverages Holdings (a joint venture betweenshareholder of the Russian beer market, behindcent. The Dutch brewer is now the third largestmarket share in Russia from 7.5 percent to 8.3 per-

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a Russian brewer.Heineken expanded into international markets by purchasing Patra,

Google, and Yahoo indicate.enter the market without having a local operating partner, as the ventures by Microsoft,been examining China for opportunities as well. However, it is difficult for firms to

Amazon.com, eBay, and Expedia havevides search engine capacity to the venture.Alibaba.com to focus on business-to-business and consumer-auction sites; Yahoo pro-provide search services for the Chinese company. Yahoo formed a joint venture withEarlier, Google opened an office in Shanghai, having formed a deal with Tencent toformed a joint venture with a Shanghai company to offer its MSN Internet portal.location for Internet-oriented companies. In May 2005 Microsoft announced it hadare now online, a market size second only to the United States. Thus China is a great

China’s Internet market has increased dramatically such that 94 million Chinesetheir strategies for managing expatriate human resources.regulation distances influence the ownership positions of multinational firms as well as

Research also suggests thatforeignness is lower than if there is high cultural distance.between the cultures in which international transactions are carried out, the liability ofences may also affect location advantages and disadvantages. If there is a strong match

Cultural influ-tion requirements as well as by the needs of the intended customers.Such location advantages can be influenced by costs of production and transporta-

advantage.to gain the full benefit of a locationfirms must manage their facilities effectively

Once positioned favorably with an attractive location,cal supplies and to customers.energy, and other natural resources. Other location advantages include access to criti-services they provide. These facilities may provide easier access to lower-cost labor,Firms may locate facilities in other countries to lower the basic costs of the goods or

Location Advantages

knowledge.investments, firms need to already have a strong R&D system in place to absorb themarkets. However, research finds that to take advantage of the international R&Dsions to learn from the different practices they encounter in separate international

Multinational firms have substantial occa-firm with new learning opportunities.vices at lower cost. In addition, working across international markets provides the

produce higher-quality goods or ser-sharing generates synergy, which helps the firm through resource and knowledge sharing between units across country borders.

Firms may also be able to exploit core competencies in international marketsworld by 2020.ing vehicles overseas as well. It aspires to be one of the six largest automakers in thecompanies in 2004. Furthermore, SAIC is seeking to develop opportunities for export-instance, with both GM and Volkswagen and produced 612,216 cars with these twotheir significant success in manufacturing cars in China. SAIC has joint ventures, foris one of the local Chinese firms that has helped these foreign car companies achieveobtain significant market share in China. Shanghai Automotive Industry Corp. (SAIC)competitively) and local investments in China, all of these companies are likely toChina. Because of global economies of scale (allowing them to price their productsVolkswagen are each producing an economy car to compete with the existing cars inadvantage over foreign carmakers due to tariffs). Ford, Honda, General Motors, andcountry and lower tariffs to be charged (in the past, Chinese carmakers have had anthe World Trade Organization will allow carmakers from other countries to enter the

Economies of scale are critical in the global auto industry. China’s decision to joinof scale.coordinating critical resource functions, it is more likely to achieve optimal economies

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borders. As the opening case suggests, companies such as Lenovo (personal computers)businesses in China, and only recently are beginning to look at markets beyond their

Chinese manufacturing companies have spent years focused on building their

The sheer size of a market segment can produce the demand necessary to create scale-nature and size of buyers’ needs in the home market for the industry’s goods or services.

is characterized by thedemand conditions,The second dimension in Porter’s model,unlike Britain, whose colonies provided large supplies of natural indigo.spent years creating a synthetic indigo dye to reduce their dependence on imports,Germany developed a strong chemical industry, partially because Hoechst and BASFneers, and systems of large firms to create an expertise in manufacturing. Similarly,lack abundant natural resources but offer a strong work ethic, a large number of engi-lack critical basic resources. For example, some Asian countries, such as South Korea,

Ironically, countries often develop advanced and specialized factors because theyglobal competitors.industry well by spawning strong home-country competitors that also can be successfulcountry has both advanced and specialized production factors, it is likely to serve anindustry, such as the workers in a port that specialize in handling bulk chemicals). If a

cialized (skilled personnel in a specifictems and the supply of debt capital) and speon factors are generalized (highway sys-a highly educated workforce). Other producti

and labor resources) and advanced factors (such as digital communication systems andtion, postal, and communication systems). There are basic factors (for example, naturalindustry—labor, land, natural resources, capital, and infrastructure (such as transporta-

This dimension refers to the inputs necessary to compete in anytors of production.The first dimension in Porter’s model is home country or regional environment.

to the advantage of firms in a dominant global industry and associated with a specificMichael Porter’s model, illustrated in Figure 8.2, describes the factors contributing

important for competitive advantage.tinues its growth into multiple international locations, the country of origin is lessinto markets located in other countries. However, research indicates that as a firm con-ities established in the home country frequently allow the firm to pursue the strategy

The resources and capabil-often the most important source of competitive advantage.features. In an international business-level strategy, the home country of operation isitive dynamics in Chapter 5. International business-level strategies have some uniqueWe discussed business-level strategies in Chapter 4 and competitive rivalry and compet-Each business must develop a competitive strategy focused on its own domestic market.

International Business-Level Strategy

strategy.value through the implementation of a business-level strategy and a corporate-level

As discussed in Chapters 4 and 6, firms expect to createresources and capabilities.advantage, each strategy must realize a core competence based on difficult-to-duplicatetransnational (a combination of multidomestic and global). To create competitiveThere are three corporate-level international strategies: multidomestic, global, orcost leadership, focused differentiation, or integrated cost leadership/differentiation.business level, firms follow generic strategies: cost leadership, differentiation, focusedbusiness-level international strategy and corporate-level international strategy. At theFirms choose to use one or both of two basic types of international strategies:

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efficient facilities.

foster the growth of certain industries. The dimension of strategy, structure, andmake up the final country dimension and alsoFirm strategy, structure, and rivalry

try in Japan.”sumer electronics industry, facilitated the emergence of a successful video game indus-and animation sector, combined with technological knowledge accumulated in the con-Similarly, it is argued that the “creative resources nurtured by [the] popular cartoonsfashion apparel, and furniture. In Japan, cameras and copiers are related industries.fact, the design services industry supports its own related industries, such as ski boots,machinery and design services also contribute to the success of the shoe industry. Ingoods, providing support in distribution. Supporting industries in leather-workingstruct shoes and related products. Also, many people travel to Italy to purchase leathertries; a well-established leather-processing industry provides the leather needed to con-has become the leader in the shoe industry because of related and supporting indus-

are the third dimension in Porter’s model. ItalyRelated and supporting industries important in Japan because homes are often small and close together.ese firms have created a niche market for compact, quiet air conditioners, which areneed to tunnel through mountains for rail and highway passage in Switzerland. Japan-example, Swiss firms have long led the world in tunneling equipment because of the

Specialized demand may also create opportunities beyond national boundaries. Foring from an emerging economy.tion of the industry in other countries, although this could be difficult for firms com-profits. The efficiency built in a large-scale market could help lead to ultimate domina-Trade Organization and are looking to overseas markets to increase market share andmoves into the West. These companies have been helped by China’s entry to the Worldequity in other countries, beginning in the Far East and seeking to make subsequentand Haier (small appliances) have begun the difficult process of building their brand

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AdvantageDeterminants of National

FIGURE 8.2

Factors ofproduction

Demandconditions

Related andsupportingindustries

Firm strategy,structure, andrivalry

, by Michael E. Porter, p. 72. Copyright ©1990, 1998 by Michael E. Porter.Competitive Advantage of NationsAdapted with the permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group, fromSource:

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Figure 8.3.corporate-level strategies are multidomestic, global, and transnational, as shown intype of international corporate level strategy followed. The three internationalor country-level managers can have substantial strategic input, depending on the

The headquarters unit guides the strategy, although business-countries or regions.strategy is required when the firm operates in multiple industries and multiple

International corporate-levelthrough both product and geographic diversification.focuses on the scope of a firm’s operationsInternational corporate-level strategy

ize the firm’s products and sharing of resources across countries.gies; other corporate strategies dictate the business-level strategies in order to standard-give individual country units the authority to develop their own business-level strate-international corporate-level strategy the firm has chosen. Some corporate strategiesThe international business-level strategies are based at least partially on the type of

International Corporate-Level Strategy

country, as illustrated in the DHL example.leads to more adjustment and learning as the firm adjusts to competition in the hostChapter 4) in an international context. However, pursuing an international strategy

cost leadership/differentiation, discussed infocused differentiation, and integrated business-level strategies (i.e., cost leadership, differentiation, focused cost leadership,tors. Thus, these distinct country factors are necessary to consider when analyzing theand implements an appropriate strategy that takes advantage of distinct country fac-Figure 8.2 are likely to produce competitive advantages only when the firm developsthe most compelling reason for success or failure. Accordingly, the factors illustrated inthat spawned the successful firms. The actual strategic choices managers make may bebecome global competitors—not even those operating with the same country factors

Although each firm must create its own success, not all firms will survive todesired.DHL has sought to improve its service quality to ultimately gain the customer loyaltyconsideration, which leads to trial, which leads to loyalty. That’s what it’s all about.”it takes time to build a business like this. One DHL executive stated, “Awareness leads toyellow paint on its delivery vehicles. DHL has had problems with its service quality, buteven until 2006. It has become more visible through an ad campaign and a great deal ofthe company lost a significant amount of money in 2004 and did not expect to breakheavily discounted. However, DHL had difficulty in competing with FedEx and UPS;which tended to have higher margins than large corporate accounts that are typicallyto take market share from UPS’s and FedEx’s small and midsized business accounts,firm, which put it in competition with UPS and FedEx. The combined company hopeddomestic shipping market through the acquisition of Airborne, a Seattle-based air cargoure of many firms and industries. In 2003, DHL Worldwide Express entered the U.S.national advantage. Government policy also clearly contributes to the success and fail-environmental or structural attributes of a national economy that contribute to

The four basic dimensions of the “diamond” model in Figure 8.2 emphasize theindustries.computer manufacturers and software producers has favored the development of thesesports cars, fashion apparel, and furniture. In the United States, competition amongItaly, the national pride of the country’s designers has spawned strong industries inhave facilitated the cross-functional management of complex assembly operations. Inand process improvements. In Japan, unusual cooperative and competitive systemsnical training system in Germany, there is a strong emphasis on methodical productrivalry among firms varies greatly from nation to nation. Because of the excellent tech-

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using a multidomestic strategy. It has become a local player in six countries outsideaerospace electronics group called Thales SA. Thales has won contracts worldwide bydefense contractor French Thomson-CSF has transformed into a new global defense and

The Frenchhad a very decentralized approach to managing its international operations.ing in each country. Historically, Unilever, a large European consumer products firm, hasstrategy decentralize their strategic and operating decisions to the business units operat-economies of scale and can be more costly. As a result, firms employing a multidomestic

Moreover, multidomestic strategies do not allow for the achievement oftry units.of the differences across markets and thus the different strategies employed by local coun-of these strategies results in more uncertainty for the corporation as a whole, because

However, the usebecause the firm can pay attention to the needs of the local clientele.The use of multidomestic strategies usually expands the firm’s local market share

firm’s competitive response to the idiosyncratic requirements of each market.needs and preferences of local customers. Therefore, these strategies should maximize aWith multidomestic strategies, the firm can customize its products to meet the specifictype of competitors), political and legal structures, and social norms vary by country.In other words, consumer needs and desires, industry conditions (e.g., the number andized approach, allowing each division to focus on a geographic area, region, or country.segmented by country boundaries. The multidomestic strategy uses a highly decentral-competition within each country. It assumes that the markets differ and therefore are

A multidomestic strategy focuses onthat unit to tailor products to the local market.decisions are decentralized to the strategic business unit in each country so as to allow

is an international strategy in which strategic and operatingmultidomestic strategyMultidomestic StrategyA

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StrategiesInternational Corporate-Level

FIGURE 8.3

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the United States. Accordingly,down, a large manufacturer inIn 2000 Cemex acquired South-of a Spanish company in 1992.Spain through its acquisitionthe number one producer inEurope. Cemex was alreadytwo-thirds of its business inU.K. cement producer with$4.1 billion. RMC is a largeCemex acquired RMC forcement products. In 2005,ents needed to make localizedthat contains all the ingredi-mix, a prepackaged productthe largest producer of readySwitzerland’s Holcim, and isbehind France’s Lafarge andcement company in the world,

Cemex is the third largestthe global strategy.firms have successfully used

Many Japanesegration among countries is occurring, such as the European Union.performance of the global strategy is enhanced if it deploys in areas where regional inte-require centralization and headquarters control. Furthermore, research suggests that thefacilitating coordination and cooperation across country boundaries, which in turn

Achieving efficient operations with a global strategy requires sharing resources andfancy features.”to give Japanese customers what they wanted, chiefly a wide lineup of phones within Japan: “By focusing too much on building a globally oriented brand, Vodafone failedacross country borders. Vodafone, in implementing a global strategy, has had difficultycult to manage because of the need to coordinate strategies and operating decisions

The global strategy is not as responsive to local markets and is diffi-the local market.fied as opportunities or because the opportunities require that products be adapted toopportunities in local markets, either because those markets are less likely to be identi-

While a global strategy produces lower risk, it may cause the firm to forgo growthaccounting and financial reporting standards are facilitating this strategy.level or in one country and utilize them in other markets. Improvements in globalscale and offers greater opportunities to take innovations developed at the corporatebeing dictated by the home office. Thus, a global strategy emphasizes economies ofthe firm offers standardized products across country markets, with competitive strategy

is an international strategy through whichglobal strategyacross these businesses.are assumed to be interdependent, and the home office attempts to achieve integrationcontrolled by the home office. The strategic business units operating in each country

As a result, a global strategy is centralized andof products across country markets.In contrast to a multidomestic strategy, a global strategy assumes more standardizationGlobal Strategy

Europe.European multinational firms because of the variety of cultures and markets found inplayers in each of these markets. The multidomestic strategy has been commonly used byimplemented its strategy with a series of joint ventures with and acquisitions of localFrance: Britain, the Netherlands, Australia, South Africa, South Korea, and Singapore.63 It

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home office.strategy being dictated by themarkets, with competitiveized products across countrywhich the firm offers standard-international strategy through

global strategyA is an

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Cemex’s global strategy works because it can integrate its subsidiaries through the use of the Internet.

conditions successfully.Renault cooperate to achieve global and regional efficiencies and adapt to local marketperformer to being one of the top performers in the industry. The business units ofthen, Carlos Ghosn, CEO of Nissan, has brought Nissan back from being a very poorto reinvigorate Nissan, in which Renault bought a controlling interest in 1999. Sinceorder to deal with the competitive trends in this industry. Renault has used this strategygests how one large global player has evolved towards the transnational strategy in

The Strategic Focus on Whirlpool’s strategy in the global appliance industry sug-tidomestic or global international corporate-level strategies.often produces higher performance than does the implementation of either the mul-gies). On the positive side, the effective implementation of a transnational strategyfor more on the implementation of this and other corporate-level international strate-transnational strategy is difficult to use because of its conflicting goals (see Chapter 11and other parties more efficiently rather than using arms-length transactions.networks allow a firm to manage its connections with customers, suppliers, partners,grated network—is required to implement the transnational strategy. Such integratedcoordination”—building a shared vision and individual commitment through an inte-

hile the other requires local flexibility. “Flexibleone requires close global coordination wachieve both global efficiency and local responsiveness. Realizing these goals is difficult:

is an international strategy through which the firm seeks totransnational strategyTransnational Strategy

strategy, which is described next.Whirlpool originally used the global strategy but has begun to pursue the transnational

As explained in the Strategic Focus,and universal standards dominates its approach.can significantly reduce costs. Connectivity between the operations in different countriesBy using the Internet to improve logistics and manage an extensive supply network, CemexCemex uses the Internet as one way of increasing revenue and lowering its cost structure.a quick payoff for its merger integration process. To integrate its businesses globally,sues a global strategy effectively, its integration of its centralization process has resulted inCemex has strong market power in the Americas as well as in Europe. Because Cemex pur-

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and local responsiveness.achieve both global efficiencythrough which the firm seeks tois an international strategy

transnational strategyA

Iraq, and regionalization.liability of foreignness, which has increased after the terrorist attacks and the war incompetitive, in part due to trends that change over time. Two important trends are themultinational firms may require this type of flexibility if they are to be strategicallytidomestic strategy with certain product lines and a global strategy with others. Many

As a result, most large multinational firms with diverse products employ a mul-country borders.products and industries may be more suited than others for standardization across

Furthermore, somehold down costs, as illustrated by the Cemex example above.national firms desire coordination and sharing of resources across country markets toparticular countries or to fit customer tastes and preferences. In addition, most multi-and services often require some customization to meet government regulations withinto the problem, there is also an increased emphasis on local requirements: global goodsciency is increasing as more industries begin to experience global competition. To addAlthough the transnational strategy is difficult to implement, emphasis on global effi-

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Whirlpool’s Progress toward the Transnational Strategy

consumers; stoves designed inand made in China for Americanovens engineered in Swedencenters, including “microwaveof appliance-manufacturingWhirlpool has a global networknology centered in Germany,

Besides the washer tech-States at $1,200 apiece.have been sold in the United2001, almost 2 million Duetsogy,” the advantage. Since“kink-free German technol-Whirlpool’s Duet, with itshigh repair rate, which gaveUnited States because of its

Germany and shipped to the United States. Maytag’s Neptune model stumbled in thefavor among American consumers it was still much cheaper for washers to be made infastest route for getting the appliances to the American market. Once the Duet gainedthat runs at high speeds. Designing and manufacturing the Duet in Germany was theGermans had worked out the technology exceptionally well for a front door and a basketwater and electricity, was available in Germany at a very small incremental investment.TheUnited States—the front-loading technology, long popular in Europe because it uses lessextremely high labor costs—$32 per hour including benefits, versus $23 per hour in thecontinue to be manufactured in Germany. Even though German-made washers haveFor instance, Whirlpool’s Duet front-loading washers and dryers were developed andUltimately these centers became centers of excellence for technology and production.began to develop various skills and designs that were fitting for a particular region.products. Over time, however, as its foreign operations evolved, each center of productionAt first, Whirlpool pursued a strategy of reducing costs and focusing on standardizedmany suppliers began to form networks around Whirlpool’s local host country facilities.began to evolve once the company became established in these foreign countries and

Although Whirlpool made a number of mistakes in its global strategy, the strategylocal markets was not functioning as anticipated.centralized global strategy of producing worldwide products with some adaptation toworse: Whirlpool lost $70 million and $62 million in Asia in 1996 and 1997, respectively. Its1996 the company reported a $13 million loss in Europe.The Asian situation was eveninternational operations. In 1995, Whirlpool’s European profit fell by 50 percent and in

However, by the mid-1990s serious setbacks had emerged in Whirlpool’sestablished four joint ventures in China, and made new investments in Latin America.of achieving this vision, Whirlpool purchased a majority stake in an Indian firm,systems, or distribution strategy, isn’t confined to one location or division.” In the processexpertise in any given area, whether it’s refrigeration technology, financial reportingintegrate our geographical businesses wherever possible, so that our most advanced

ward its vision: “[O]ur vision at Whirlpool is toWhitwam described Whirlpool's progress toposition in Europe but also an entrance into Asian distribution. In 1994 then CEO Davidappliance business for $2 billion.This acquisition gave Whirlpool not only a strongleadership as the industry evolved. In 1989 Whirlpool acquired Philips NV's Europeanvision, Whirlpool planned a global strategy that would allow it to pursue worldwidethat over time the industry would be dominated by a handful of global players.With thatIn the late 1980s, Whirlpool analyzed the international appliance industry and concluded

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regional and country environments and enhance its global competitive position.strong cost focus and has improved its designs in order to more fully adapt to specificcompetitively. In implementing its transnational strategy, Whirlpool has maintained aexcellence co-exist with the high skills necessary to allow its global network to functionHowever, Whirlpool has not had to downsize in the United States, where its centers ofemployment in the United States has not risen in years while it has tripled abroad.thus contribute to the lopsided trade deficit in the United States. Furthermore, Whirlpool’sthan 40 percent of imports are from U.S. overseas subsidiaries.These overseas subsidiariesglobal approach by using a transnational strategy. Interestingly, in the United States more

Whirlpool and other multinationals are evolving toward more sophistication in theirOhio, for American consumers, although some are sold in Mexico.”Brazil and exported to Europe; and top-loading washers made at a sprawling factory in Clyde,America and made in Tulsa, Oklahoma, for American consumers; refrigerators assembled in

country without a lot of initial marketing expenses. Once the online business is largeof mouth and limited online advertising, a Web site business can be built in a foreignand Ireland in 2000 prior to initiating a catalog business in those countries. With wordestablished Web sites in the United Kingdom and Germany in 1999 and in France, Italy,Roebuck and Co., launched the Web-based portion of its business in 1995. The firmsale. Lands’ End, formerly a direct-mail catalog business and now a part of Sears,operation of Lands’ End, Inc., which uses local Internet portals to offer its products for

The globalization of businesses with local strategies is demonstrated by the onlineWeb-based strategies also requires local adaptation.facilitate communications across the globe, as noted earlier, the implementation oftation. Although parallel developments in the Internet and mobile telecommunication

As such, firms may focus less on truly global markets and more on regional adap-explanations for these concerns.

The September 11, 2001, attacks and the 2003 war in Iraq are twobased strategies.prevalent as once thought and are very difficult to implement, even when using Internet-

Research shows that global strategies are not asemployees charged to enact them.”because of the lack of fit between its transferred personnel policies and the Frenchcountries. For example, Disney suffered “law suits in France, at Disneyland Paris,illustrated by the experience of Walt Disney Company in opening theme parks in foreignthere are legitimate concerns about the relative attractiveness of global strategies. This is

However,tries, including the United States, Japan, Korea, and the European Union.represent potential major international market opportunities for firms from many coun-becoming global markets. In the 21st century, China, India, Brazil, and Eastern Europeawakened them to the importance of international competition in what were rapidlyand other international markets in the 1980s was a powerful jolt to U.S. managers andThe dramatic success of Japanese firms such as Toyota and Sony in the United States

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72(2): 137–148.Harvard Business Review,The right way to go global: An interview with Whirlpool CEO David Whitwam,February, W-21-W-24; R. F. Maruca, 1994,Appliance Manufacturer,December 9, 1; R. J. Babyak, 1995, Strategic imperative,

Wall Street Journal,Whirlpool pursues overseas markets—foreign restructuring in a European recovery may hold promise,Thunderbird’s Case Collection, The Garvin School of International Management; C. Quintanilla, 1997, Despite setbacks,

September 27, R6; A. C. Inkpen, 2000, Whirlpool Corporation’s global strategy,Wall Street Journal,It brings jobs to the U.S.,(a special report); Against the grain: A Chinese appliance maker has placed its bet on a counterintuitive strategy:

World82(10): 114–120; K. K. Spors, 2004,Harvard Business Review,R. E. Sloane, 2004, Leading a supply chain turnaround,www.nytimes.com, June 17;New York Times,June, 73–75; L. Uchitelle, 2005, Globalization: It’s not just wages,Fast Company,

June 8, A14; C. Salter, 2005, Whirlpool finds its cool,Wall Street Journal,C. K. Prahalad, 2005, The art of outsourcing,Sources:

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Mexico’s exports to this country. Research suggestsof the United States, and NAFTA greatly increasedIn fact, Mexico is the number two trading partnerpose of U.S. businesses moving across its borders.strategies. NAFTA does not exist for the sole pur-vides greater opportunity for regional internationalinternational strategies within this region and pro-in North America. NAFTA loosens restrictions onMexico, facilitates free trade across country borders(NAFTA), signed by the United States, Canada, and

The North American Free Trade Agreementincreasing.global strategies because the size of the market ismay prefer to pursue regional strategies versusadded to the agreement, some international firmsprocess likely to continue as new countries arecreates more unity in European markets. With thisbetter coordinate pan-European brands as the EU

Many European firms acquire and integrate their businesses in Europe totive regions.agreements to promote the flow of trade across country boundaries within their respec-Organization of American States (OAS) are country associations that developed traderegions may promote regional strategies. The European Union (EU) and South America’s

Countries that develop trade agreements to increase the economic power of theirticular region rather than being truly global.For instance, research suggests that most large retailers are better at focusing on a par-achieve some economies, even though it may have to employ a multidomestic strategy.may be able not only to better understand the markets in which it competes, but also tosome coordination and sharing of resources would be possible. In this way, the firmthe firm may choose a region of the world where the markets are more similar andrather than competing simultaneously in the Middle East, Europe, and the Far East. Or,petition in those markets. For example, a firm may focus on Far East markets onlycultures, legal and social norms, and other factors that are important for effective com-focus to a particular region of the world. In so doing, it can better understand thegreatly (in which it must employ a multidomestic strategy) may wish to narrow its

However, a firm that competes in industries where the international markets differmarkets can also have higher performance.the combined market size. Research suggests that firms that compete in risky emergingregions. Competing in all markets provides economies that can be achieved because ofwhether to compete in all or many global markets, or to focus on a particular region or

it must decideBecause a firm’s location can affect its strategic competitiveness,Regionalization is a second trend that has become more common in global markets.

in each country or region.a store. Even with custom ordering systems, significant local adaptation is still neededover the Internet. Service can be enhanced by being able to order online and pick up at

onal customization for fitting apparel sizesretailers are going further by creating perseir home location. Lands’ End and other(brick-and-mortar) facilities outside of th

services globally when facilitated by electronic infrastructure without having significanthave used the business online. Thus, even smaller companies can sell their goods andenough, a catalog business can be launched with mailings targeted to customers who

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a trade agreement intended to reduce tariffs.President Bush meets with Central American presidents about CAFTA,

them in regional or world markets, it must choose a market entry mode.After the firm selects its international strategies and decides whether to employ

are successful. They also usually invest in the same area as their original investmentinto these markets first, followed by their other lines of business once the first linesthey are more familiar. They also introduce their largest and strongest lines of business

Most firms enter regional markets sequentially, beginning in markets with whichAmerica plus the Dominican Republic in the Caribbean Sea.law in 2005 but not yet implemented, would reduce tariffs with five countries in Central

The Central American Free Trade Agreement (CAFTA), signed into U.S.exporting firms.than are those pursuing a cost leadership strategy) and by their experience and rivalry withment (those with a differentiation strategy are more positively disposed to the agreementthat managers of small and medium-sized firms are influenced by the strategy they imple-

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with host-country firms.distributing their products. Usually, exporting firms develop contractual arrangementstions in the host countries, but exporters must establish some means of marketing and

Exporting does not require the expense of establishing opera-vices to other countries.Many industrial firms begin their international expansion by exporting goods or ser-

Exporting

tional markets affects the firm’s performance in those markets.tages and disadvantages. Thus, choosing the appropriate mode or path to enter interna-their characteristics are shown in Table 8.1. Each means of market entry has its advan-new wholly owned subsidiaries. These means of entering international markets anding arrangements, forming strategic alliances, making acquisitions, and establishingInternational expansion is accomplished by exporting products, participating in licens-

Choice of International Entry Mode

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above-average returnshigh risk, maximum control, potential

New wholly owned subsidiary Complex, often costly, time consuming,ing with domestic operationscomplex negotiations, problems of merg-

Acquisition Quick access to new market, high cost,corporate cultures)risks, problems of integration (e.g., two

Strategic alliances Shared costs, shared resources, sharedLicensing Low cost, low risk, little control, low returnsExporting High cost, low controlType of Entry Characteristics

TABLE 8.1

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market.”and other specialty stores focused on apparel for “a previously untapped teen/adultlarge business by licensing figures such as Elmo, Snuffleupagus, and the Count to Target

The Sesame Street Workshop, creator of the Muppet figures, has created aexpensive.used and contracts are often completed in foreign markets where labor may be lesstoy industry faces relentless change and an unpredictable buying public, licensing isproduct life cycles are short, licensing may be a useful tool. For instance, because the

Even ifLicensing is also a way to expand returns based on previous innovations.maintains control of the distribution.licensing agreement rather than foreign direct investment by Philip Morris, Chinaadvantage of the opportunity as China opens its markets more fully.both the Chinese firms and Philip Morris have formed a licensing agreement to takefirms would get access to the most famous brand in the world, Marlboro. Accordingly,tional, have an incentive to form a deal with such state-owned firms. The state-ownedsuch, cigarette firms such as Altria Group, parent company of Philip Morris Interna-Chinese market because state-owned tobacco firms have lobbied against such entry. Asing due to health concerns. But U.S. cigarette firms have had trouble entering the

China is a large and growing market for cigarettes, while the U.S. market is shrink-possibly the least costly form of international expansion.facturing, marketing, and distributing the goods or services. As a result, licensing isThe licensee takes the risks and makes the monetary investments in facilities for manu-

The licenser is normally paid a royalty on each unit produced and sold.countries.the right to manufacture and sell the firm’s products within a host country or set of

A licensing arrangement allows a foreign company to purchaseamong smaller firms.Licensing is an increasingly common form of organizational network, particularly

Licensing

U.S. exporters.U.S. goods less costly to foreign buyers, thus providing some economic relief forwhich makes imports to the United States more expensive to U.S. consumers andnesses face. The Bush administration has supported a weak dollar against the euro,

Currency exchange rates are one of the most significant problems small busi-entry.Small businesses are most likely to use the exporting mode of international

likely to slow its progress, high-speed technology is still the wave of the future.facilitate applications for export and import licenses. Although the terrorist threat is

Governments also use the Internet topetition, and find lists of potential customers.critical information about foreign markets, examine a target market, research the com-

Even small firms can accessillustrated by the Lands’ End system described earlier.half of the goods exported from Texas. The Internet has also made exporting easier, asbors. For example, U.S. NAFTA partners Mexico and Canada account for more thanlower transportation costs and the usually greater similarity between geographic neigh-

Firms export mostly to countries that are closest to their facilities because of theemerging economies.exports in developed countries, whereas differentiation strategies are more successful inHowever, evidence suggests that cost leadership strategies enhance the performance ofexporting or to provide a product that is customized to each international market.

As a result, it may be difficult to market a competitive product throughearn a profit.pay the distributor or allow the distributor to add to the price to recoup its costs andover the marketing and distribution of its products in the host country and must eitherpossible tariffs placed on incoming goods. Furthermore, the exporter has less control

The disadvantages of exporting include the often high costs of transportation and

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find its new access to the expanding firm’s technology and innovative products attractive.In return, the host-country firm may(because it is partnering with a local company).

well, in that it gains access to a new market and doesn’t have to pay tariffs to do sonew to them. This type of arrangement can benefit the non-emerging economy firm asinternational alliances and ventures to gain access to sophisticated technologies that areand market a competitive product. Often, firms in emerging economies want to formtural idiosyncrasies of the country, which should help the expanding firm manufacture

nditions, legal and social norms, and cul-that knows and understands the competitive coAs in the GE example, most strategic alliances are formed with a host-country firm

with 20 percent in the previous decade.growth from developing or emerging market countries over the next decade comparedment, CAFTA, is in the works. GE Finance expects to get 60 percent of its revenueegy in order to reduce risk in an emerging market economy where a free market agree-one of the largest issuers of credit cards in the region. GE is using a joint venture strat-Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Panama. GE Finance is alsoone of Central America’s largest banks. BAC International has 178 branches in Costa

GE Finance recently agreed to take a 49.9 percent stake in BAC International Bank,gic competitiveness.the development of new core competencies that contribute to the firm’s future strate-

Moreover, strategic alliances can facilitaterequired to enter international markets.Strategic alliances allow firms to share the risks and the resourcesexpansion.

In recent years, strategic alliances have become a popular means of international

Strategic Alliances

a firm think ahead and consider sequential forms of entry in international markets.ownership arrangement, licensing may create some inflexibility. Thus, it is important thatMarriott has used franchise licensing successfully, if a firm wants to move to a different(St. Regis, Sheraton, and Westin hotel chains), which own over 30 percent. Althoughcent of the properties, unlike Hilton and Starwood

However, Marriott owns less than 3 per-from rivals.”pering loyal customers and winning bookings awayemployees, but franchised hotel owners—while pam-obsessively whipping its troops into line—not justnoted that Marriott has “become the industry leader bytion as a franchise licenser of hotel chains. One analyst

Marriott International Inc. has achieved distinc-technology it had gained from the U.S. companies.licenses and developed its own products using theing equipment business. Komatsu then dropped theseEngine to compete against Caterpillar in the earthmov-International Harvester, Bucyrus-Erie, and Cumminsfor example, first licensed much of its technology fromcompetitive product after the license expires. Komatsu,learn the technology and produce and sell a similarand the licensee. Worse, the international firm maybecause returns must be shared between the licensertion, licensing provides the least potential returns,

In addi-license deals must be structured properly.and marketing of its products in other countries. Thus,gives the firm very little control over the manufacture

Licensing also has disadvantages. For example, it

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an extra cost. International negotiations for acquisitions can be exceedingly complexIn addition, they can be expensive and also often require debt financing, which carries

in the Opening Case (also see Chapter 7).vantages of domestic acquisitions, as indicated markets, they are not without costs. International acquisitions carry some of the disad-

Although acquisitions have become a popular mode of entering internationalemerging economies in Eastern Europe.fore the combination would allow better market power within Western Europe andalso been buying banks in other parts of Europe, especially in Eastern Europe. There-financial services across European Union country boundaries. Both of these firms haveale behind this acquisition is that the market for banking will ultimately be unified for

Unicredito Italiano SPA has agreed to buy Germany’s HVB Group AG. The ration-European markets.

Also, acquisitions are the mode used by many firms to enter Easternlocal firms.For example, Wal-Mart has entered Germany and the United Kingdom by acquiring

Thus, entry is much quicker than by other modes.sion of any of the alternatives.acquisitions may provide the fastest, and often the largest, initial international expan-

quick access to a new market. In fact,explained in Chapter 7, acquisitions can provide comprised more than 45 percent of all acquisitions completed worldwide.have also been increasing significantly. In recent years, cross-border acquisitions haveAs free trade has continued to expand in global markets, cross-border acquisitions

Acquisitions

Alliances can also lead to an acquisition, which is discussed next.scope.strategic flexibility and when the transaction is used to maintain economies of scale or

Acquisitions are better in situations with less need forand medium-sized firms.edge between partners and where strategic flexibility is important, such as with smallable in the face of high uncertainty and where cooperation is needed to share knowl-

Research suggests that alliances are more favor-acquisition may be a better option.If conflict in a strategic alliance or joint venture will not be manageable, anbuilding.

a research collaboration, equity can serve as a barrier to the necessary relationshipgreater depth in Chapter 9). However, if trust is required to develop new capabilities in

(strategic alliances are discussed incontrol, tend to produce more positive returnsResearch has shown that equity-based alliances, over which a firm has more

country cultures involved in the alliance or joint venture.Trust is also influenced by theagreement, partner interactions, and external events.

issues: the initial condition of the relationship, the negotiation process to arrive at anto sour. Trust between the partners is critical and is affected by at least four fundamental

Several factors may cause a relationshipgic alliances are especially difficult to manage.International strate-include incompatible partners and conflict between the partners.

The primary reasons for failureNot all alliances are successful; in fact, many fail.has helped the Renault and Nissan alliance succeed over the years.with their own company cultural values. Such a multi-faceted and versatile approachis seen by other partners in the venture, and learn to adapt while remaining consistentunderstand factors that determine the norms in different countries, know how the firmmanaged. Research suggests that company executives need to know their own firm well,Japanese partner, Nissan, has been successful over the years because of the way it was

The alliance mentioned above between Renault, a French automaker, and itscan facilitate improved performance.

Managing these expectationsamong those desired capabilities are technological skills.partners often enter an alliance with the purpose of learning new capabilities. Common

Indeed,Each partner in an alliance brings knowledge or resources to the partnership.116

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than a joint venture.tional policy changed, many firms chose to go with a wholly owned approach ratherhad to change their institutional policy to allow more foreign ownership. As the institu-wholly owned approach. For instance, after the Asian financial crisis many countriesResearch also suggests that if a policy change emerges, firms prefer to move toward alearn and implement appropriate marketing strategies to compete in the new market.pany must build new manufacturing facilities, establish distribution networks, and

Furthermore, the com-the technology, marketing, and distribution of its products.competitors, or consultants, which can be costly. Still, the firm maintains control overexpertise of the existing market by hiring either host-country nationals, possibly frombusiness operation in a new country. The firm may have to acquire the knowledge and

The risks are also high, however, because of the costs of establishing a newto a host nation through a greenfield approach.unionization and high cultural distance would cause difficulty in transferring knowledgepreferred when a firm is human capital intensive—that is, where a strong local degree ofwhere physical capital-intensive plants are planned and that acquisitions are more likely

Other research suggests that greenfield investments are more prominentrequired.“high levels of professional skills, specialized know-how, and customization” arestaff are preferred” in service industries where “close contacts with end customers” andetary technology. Research also suggests that “wholly-owned subsidiaries and expatriatewith a greenfield venture. More control is especially advantageous if the firm has propri-

A firm maintains full control of its operationsleveraged through a greenfield venture.potential is especially true of firms with strong intangible capabilities that might becontrol to the firm and has the most potential to provide above-average returns. This

This process is often complex and potentially costly, but it affords maximumventure.greenfieldThe establishment of a new wholly owned subsidiary is referred to as a

New Wholly Owned Subsidiary

approval.government opposition in the UK and must clear extra regulatory hurdles to receive

However, the SAIC bid has formidablenow fully funded the bid, worth $104 million.through the MG Rover label. SAIC had previously considered a joint venture but hasChinese firm an entry point into Europe and an opportunity to establish its own brandBritish auto producer, which is now in insolvency. This acquisition would give theproducer, has made an acquisition bid for the assets of MG Rover Group, a historic

opposition. SAIC, a China-based automobilecessful largely due to U.S. government takeover bid of Unocal by CNOOC described in the Opening Case. This bid was unsuc-spurring the companies to seek foreign oil sources. This is illustrated by the attemptedstrategy. China’s increasing petroleum needs and dependence on the Middle East are

China is home to several large energy companies that are finally forming a globalmultiple risks.access to new markets they provide, they also carry with them important costs andTherefore, while international acquisitions have been popular because of the rapidcorporate cultures, but also with potentially different social cultures and practices.than in domestic acquisitions. The acquiring firm must deal not only with differentthe problems of merging the new firm into the acquiring firm often are more complex

frequently present significant problems. Finally,information to negotiate an agreement and regulatory requirements in the target firm’s country and obtaining appropriate

Dealing with the legalcompared with 40 percent of bids for domestic acquisitions.estimated that only 20 percent of cross-border bids lead to a completed acquisition,and are generally more complicated than domestic acquisitions. For example, it is

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venture.referred to as a wholly owned subsidiary isThe establishment of a new

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the firm’s unique set of resources, capabilities, and core competencies.industry’s competitive conditions, the country’s situation and government policies, andmarkets. The decision regarding which entry mode to use is primarily a result of thethe firm may use several, but not all, of the different entry modes, each in different

In other cases,tially, beginning with exporting and ending with greenfield ventures.the situation at hand. In some instances, the various options will be followed sequen-

Thus, to enter a global market, a firm selects the entry mode that is best suited totions in emerging economies.

have been adept at making acquisi-direct investment. In particular, Korean specialized abilities in managing differences in inward and outward flows of foreignemerging economies, not only gain resources through diversification but also have

Large diversified business groups, often found invaluable core competencies.strategies tend to be more successful when the firm making the investment possessescome at later stages in the development of an international strategy. In addition, boththan another mode of entry. Both acquisitions and greenfield ventures are likely toform of foreign direct investment (e.g., greenfield ventures, joint ventures) rathermanufacturing, it would likely lose these advantages. Therefore, Toyota uses someThese advantages for Toyota are based on effective management; if Toyota outsourced

n for producing high-quality automobiles.using a team approach and a reputatioadvantages that must be maintained internally: efficient manufacturing techniques

Toyota, for example, has twothrough both greenfield ventures and joint ventures.such as Honda, Nissan, and Toyota, have gained a presence in the United States

Many Japanese auto manufacturers,used acquisitions to build a global presence.ventures, while military equipment firms such as Thales SA, as noted above, haveventures may be required. Large aerospace firms Airbus and Boeing have used joint

To secure a stronger presence in international markets, acquisitions or greenfieldpreferred.fast, and the need for global integration is high, the wholly owned entry mode iseconomy are not well protected, the number of firms in the industry is growing

However, if intellectual property rights in the emergingan emerging economy.ment. Also, the strategic alliance is often used in more uncertain situations, such asexport, licensing, and strategic alliance—are good tactics for early market develop-alliances also reduce risk through the sharing of costs. Therefore, all three modes—firm to connect with an experienced partner already in the targeted market. Strategicas in the Komatsu example. Strategic alliances have been popular because they allow aLicensing can facilitate the product improvements necessary to enter foreign markets,requires no foreign manufacturing expertise and investment only in distribution.

Initially, market entry will often be achieved through export, whichfactors.A firm’s choice of mode of entry into international markets is affected by a number of

Dynamics of Mode of Entry

their systems.ciency. Greenfield ventures also help the firms to maintain the proprietary nature ofto maintain the integrity of their IT and logistics systems in order to maximize effi-Hong Kong airport. These investments will be wholly owned because these firms needbuild hubs in Shanghai and Guangzhou, respectively. DHL already has a hub in theyear through 2023. Accordingly, both UPS and FedEx have announced that they willand Asia Pacific region. China’s air cargo market is expected to grow 11 percent perUPS and FedEx. The impact of this globalization is especially pertinent to the China

The globalization of the air cargo industry has implications for companies such as

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explained later.above-average returns, international diversification can be carried too far, ashensive to venture. Although multinational firms such as Petronas can produceother places, where more technologically developed Western rivals have been appre-

It has gone to Iraq and the Sudan, amongfully and has operations in 32 countries.tions abroad to fill the potentially growing reserve challenge. It has done so success-domestic opportunities exist to drill for new reserves, Petronas expanded its opera-owned monopolies. Because Malaysia’s oil reserves have dwindled and because fewHowever, Petronas’ operations are profitable, which is usually counter to most state-

The Malaysian oil company Petronas, like China’s CNOOC, is state-owned.contract.kets. Furthermore, offshoring increases exports to firms that receive the offshoringengaged in it, especially as firms move into markets with more flexible labor mar-

value-creation opportunities for firms“Offshore outsourcing” has created significant firms can develop more flexible structures to adjust to changes that might occur.market opportunities. Also, through global networks with assets in many countries,United States, and may thereby benefit from global scanning for competition andfirms may have access to more flexible labor markets, as the Japanese do in thein order to enhance its profit potential. In addition, internationally diversifiedpoor returns in a domestic market may encourage a firm to expand internationallyAlso, a firm’s returns may affect its decision to diversify internationally. For example,because sharing knowledge resources between operations can produce synergy.national diversification may allow them to better exploit their core competencies,

Firms in the Japanese auto industry, particularly Toyota, have found that inter-technologies from their international diversification.established firms. New ventures can also enjoy higher returns when they learn newthese outcomes can be achieved by smaller and newer ventures, as well as by larger and

All ofstabilize returns. The stabilization of returns helps reduce a firm’s overall risk.scale and experience, location advantages, increased market size, and the opportunity tofor the positive effects of international diversification, such as potential economies of

There are also many reasonsthey diversify geographically into core business areas.international markets usually achieve the most positive stock returns, especially wheninvestments in international markets. Firms that are broadly diversified into multiple

In fact, the stock market is particularly sensitive tomanage international expansion.diversification increases, firms’ returns decrease and then increase as firms learn toshould be related positively to firms’ returns. Research has shown that, as internationallocations or markets. Because of its potential advantages, international diversificationservices across the borders of global regions and countries into different geographic

is a strategy through which a firm expands the sales of its goods ordiversificationInternationalAs noted earlier, firms have numerous reasons to diversify internationally.

International Diversification and Returns

international strategy increases when that strategy is effectively implemented.advantage (see Figure 8.1). The probability the firm will achieve success by using anas explained next, international expansion is risky and may not result in a competitiveattention to implementation issues (see Chapter 11). It is important to do this, becauseOnce its international strategy and mode of entry have been selected, the firm turns its

markets.geographic locations orcountries into differentborders of global regions andgoods or services across thefirm expands the sales of itsis a strategy through which aInternational diversification

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diverse markets among top-level managers facilitates intrafirm coordination and theteams are discussed further in Chapter 12). Moreover, an in-depth understanding of

(top-managementgreater knowledge of international markets and their idiosyncrasiesEvidence suggests that more culturally diverse top-management teams often have a

international diversification.country that are looking to enter a less developed country in pursuit of increasedespecially true when partnering with multinational firms from a more developedgain more from being product-diversified than firms in developed countries. This is

Research also suggests that firms in less developed countriesdeveloped countries.international diversification often contributes more than product diversification inthat media firms gain from both product and geographic diversification. However,product-diversified and internationally diversified is significant. Research indicatesof these firms’ product lines, but the complexity of managing a firm that is bothdiversified firms. International diversification would increase market potential in eachmance and innovation, such diversification may even enhance returns in product-

Because of the potential positive effects of international diversification on perfor-diversification and investment in R&D.returns of the firm, which then provides more resources for continued internationalin research and development. The latter, if done appropriately, should enhance theinternational diversification, which in turn provides incentives and resources to investcomplex. Some level of performance is necessary to provide the resources to generate

The relationship among international diversification, innovation, and returns isplace as well.that to take advantage of R&D investment, knowledge absorptive capacity needs to be in

Research, however, findsinto their operations, further innovation can be developed.processes. If they learn about those products and processes and integrate this knowledgeaddition, firms moving into international markets are exposed to new products and

evident versus in developing economies.relatively strong ownership advantage is focused on strategy development as well as market-seeking purposes. In these firms, aand labor cost-saving purposes, whereas investment in developed economies is moreforeign direct investment in developing countries is focused more on market-seekingtive advantage created by the innovation. For instance, research suggests that Japanesenecessary returns from innovation before competitors can overcome the initial competi-international diversification improves a firm’s ability to appropriate additional and

As a result,possible to recover the investment before the technology becomes obsolete.required to recoup the original investment. If the time is extended, it may not even bedomestic markets may find such investments problematic because of the length of time

such investment. Firms operating solely inoperations required to take advantage ofobsolescence makes it difficult to invest in new technology and the capital-intensiverequired to sustain a large-scale R&D operation. An environment of rapid technological

In addition, international diversification may be necessary to generate the resourcesprovides incentives for firms to innovate.the often substantial risks of R&D investments. Therefore, international diversificationreturns on their innovations (through larger or more numerous markets) and lowers

International diversification provides the potential for firms to achieve greaterupgrade it continually.tions and products. Therefore, the only way to sustain a competitive advantage is toinevitably, competitors outperform firms that fail to innovate and improve their opera-petitiveness depends, in part, on the capacity of its industry to innovate. Eventually andstrategic competitiveness. As noted in Porter’s model (see Figure 8.2), a nation’s com-In Chapter 1, we indicated that the development of new technology is at the heart of

International Diversification and Innovation

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bility of some national governments.environments, potentially rapid shifts in the value of different currencies, and the insta-complexities include the highly competitive nature of global markets, multiple culturalaging the different accounting and reporting standards used in each country.tries. One of the difficulties it has is coordinating the different IT platforms and man-

For example, the Body Shop has retail outlets in over 50 coun-exceed their benefits.large and diverse before becoming unmanageable, or before the costs of managing themare involved when a firm operates in several different countries. Firms can grow only so

For example, multiple risksdoing so is complex and can produce greater uncertainty.Although firms can realize many benefits by implementing an international strategy,

Complexity of Managing Multinational Firms

performance.In turn, this approach facilitates improved innovation and

use of long-term, strategically relevant criteria to evaluate the performance of man-agers and their units.167

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private sector.investing in Russia given the current trend toward more government control over thetried to create more reassurance with regard to property rights, firms are still leery offoreign direct investment in Russia. Although Vladimir Putin, Russia’s president, hasRussian government. This trend has given pause to some firms considering significantacquisitions of Russian businesses such as by Seimens AG were not approved by theilated into Gazprom, a government-owned oil and gas enterprise. Furthermore, otherwas jailed because of the accusations. As a result, the assets of Yukos were partly assim-thriving oil and gas firm, was penalized for alleged tax fraud and broken up. The CEOexecutives as well as seeking to gain state control of firm assets. For example, Yukos, a

Russia has reduced foreign direct investment by prosecuting powerful private firmtheir investments or assets because of unrest and government instability.have concerns about the stability of the national government and what might happen to

Foreign firms that invest in another country maynationalization of private assets.thorities or corruption; and the potentialtence of many, possibly conflicting, legal au

including economic risks and uncertainty created by government regulation; the exis-civil and international. Instability in a national government creates numerous problems,

are risks related to instability in national governments and to war, bothPolitical risks

Political Risks

examples of political and economic risks are shown in Figure 8.4.tiveness; on other occasions, they have a negative effect on the firm’s efforts. Specific

bute to the firm’s strategic competi-was predicted. Sometimes, these situations contriaccustomed to market conditions yielding competitive situations that differ from whateconomic. Taking these risks into account, highly internationally diversified firms aretional expansion is difficult to implement and manage. The chief risks are political and

Because of these risks, interna-International diversification carries multiple risks.172

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cerns about terrorism in Indonesia have kept firms from investing in the IndonesianAnother economic risk is the security risk posed by terrorists. For instance, con-

and might also risk sanctions from international political bodies such as the WTO.enforcement, or they risk losing their reputation in the eyes of potential investing firmstherefore need to create and sustain strong intellectual property rights and theirtheir intellectual property, they will not make foreign direct investments. Countriespendent with political risks. As discussed in the Strategic Focus, if firms cannot protectAs illustrated in the example of Russia and property rights, economic risks are interde-

Economic Risks254

Risk in the International EnvironmentFIGURE 8.4

Political Risks

War in Iraq and Afghanistan following the September 11, 2001, terrorist attacks

Continual warfare between the Palestinians and Israel

Potential of war between Pakistan and India

Potential of integration between Northand South Korea

Failure of the Argentine economy anddevaluation of the peso

Challenges for China in implementing theWorld Trade Organization agreements

The proposed constitution as well as entry of new countries into the European Union strengtheningthe euro currency and uniting Europe more tightly with existing and new partner countries

Success of privatization and firmrestructuring among Eastern Europeancountries

Economic Risks

43(1): 41–62.Management International Review,foreign direct investment: An empirical analysis,www.businessweek.com, May 22; J. H. Zhao, S. H. Kim, & J. Du, 2003, The impact of corruption and transparency onOnline,

BusinessWeekJanuary 31, B1;W. Rugg, 2003, A down dollar’s lure—and peril,Wall Street Journal,pilfer toy makers’ ideas,www.forbes.com, July 1; G. A. Fowler, 2003, Copies `R’ Us—Pirates in China move fast toForbes,how fast, how dangerous?

March 20, A1; J. Flint, 2003, China: How big,Wall Street Journal,global economy, much rides on how the U.S. war plays out,www.nytimes.com, June 20; B. Davis, R. Buckman, & C. Rhoads, 2003, A global journal report: ForNew York Times,Greece,

33: 203–221; F. Bruni, 2003, With a constitution to ponder, Europeans gather inJournal of International Business Studies,K. D. Brouthers, 2003, Institutional, cultural and transaction cost influences on entry mode choice and performance,

April 5, 71;The Economist,2003, Finance and economics: The perils of convergence; Economics focus,Sources:

Focus Strategic

Intellectual Property Enforcement?Are China and India Changing Their Approach to

patents, trademarks, andfor people caught violatingChina, instead of imposing finesCommerce, has suggested thatU.S. Assistant Secretary offor the Chinese.William Lash,difficult concept to adjust tolectual property ownership is aviduals or to enterprises, intel-to the people and not to indi-“collectively” to the state andChina property belongedduring the Communist era incult one to overcome. Becausethe culture in China is a diffi-Trade Organization. However,its entrance into the World

Of course, China has taken on more intellectual property rights obligations withconfronted a company producing a scooter that it called a “Hongda.”little recourse in the Chinese courts, especially in remote parts of the country. HondaPhilips Electronics NV has continually faced counterfeiting in their compact sales with90 percent of the Microsoft-labeled software used in China is actually counterfeit.dering locating a new R&D and manufacturing facility in China. Microsoft claimed thatFostering better intellectual property protection is important for any firms consi-cajoling Beijing to do a better job of marshalling intellectual property protection.property. Other Asian and European business groups besides U.S. firms have beenrecent cases in which the Chinese courts have protected a foreign firm’s intellectual

Similar experiences are being encountered in the Chinese market. There are fewprofits for their product innovations.Indian pharmaceutical, software, and other knowledge-industry participants to retainstronger intellectual property laws and enforcement create a better environment for2004, twice as many as were applied for in the previous four years combined. Accordingly,applied for nearly 800 patents at the World Intellectual Property Organization (WIPO) inprotection becomes more reasonable. For instance, Indian pharmaceutical companiesenterprises in the pharmaceutical industry outside of India, stronger international patentIndian companies consider foreign direct investment and developing multinationalinexpensive for local consumers—as little as one-tenth the original prices. However, aspharmaceutical industry focused on generic drug manufacturing to keep medicines quitecreated abroad by merely changing the manufacturing process.This allowed a localsystem, for example, allowed Indian pharmaceutical companies to copy drug patentsimitation of more highly developed countries’ intellectual property. India’s previous patentstages of a country’s economic development, lax intellectual property laws allow thepossibility of stronger patent protections for scientific intellectual property. In the early

Interestingly, many of India’s most innovative companies are welcoming theintellectual property rights.these countries are reconsidering their current laws and enforcement arrangements forpharmaceuticals. However, as China and India open their markets, government officials inproblem exists for a large variety of industries from movies and music to software andhas made it difficult for Western innovation-oriented firms to be successful there.ThisThe lack of intellectual property protection in large nations such as China and India

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at a shop in the Lowu Commercial Center in Shenzhen, China.a shopper looks over some of the counterfeit handbags on displayThe sale of counterfeit products is a problem in China; here,

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centers, China will need to change its anti-intellectual property right culture.value-added investment of technology companies such as research and developmentFurthermore, to create an incentive for increased foreign direct investment of highenlightened self-interest can be the only driver for the true cultural change needed.”structural safeguards protecting intellectual property rights. One analyst concluded,“Suchinnovations and wisdom, it is likely to follow that the government will implement stronger“made in China” to “created in China.” If other nations begin to pirate their hard-earnedbe a significant strategic leap when state-owned firms move from a focus on productsmanagerial mind-set in moving from an orientation of imitation toward innovation. It will

However, as Chinese firms enter world markets, there needs to be a shift ininterests.are potentially in conflict with its private enterprises’ commercial and entrepreneurialassociated with state-owned firms.Thus, China’s state-owned firms’ political interestsout the country, if successful, may undermine the power and employment opportunitiesinnovation that would take place in private laboratories and startup companies through-knowledge such as those associated with patents and copyrights. New invention andproperty rights in the economy undermines private property rights, especially intangible

However, others argue that the government ownership and control of intellectualapproach, he argues, would send a stronger signal to counterfeiters.copyrights, should launch criminal actions against counterfeiters. Such an enforcement

returns often level off and become negative as the diversification increases past someFirms tend to earn positive returns on early international diversification, but the

Limits to International Expansion: Management Problems

where the currency is higher look stronger but weakens the pricing power of their exports.panies do not look as good as they might otherwise. However, it makes the assets of firmstorically, it was gaining more strength in 2005. As such, overseas profits for American com-markets because of the price differential of the products. Although the dollar was weak his-

An increase in the value of the dollar can harm U.S. firms’ exports to internationalprices of goods manufactured in different countries.

mpetitiveness in global markets because of its effect on thematically affect a firm’s coother countries. Furthermore, the value of different currencies can also, at times, dra-can reduce the value of U.S. multinational firms’ international assets and earnings inassets and earnings of U.S. firms; for example, an increase in the value of the U.S. dollarvalue of the dollar relative to other currencies determines the value of the internationaltion are the differences and fluctuations in the value of different currencies.

As noted earlier, foremost among the economic risks of international diversifica-growth in China and India, which have fewer security risks.population, has a hard time competing for investment against the comparatively fasternew investors to sustain economic growth. Indonesia, with the world’s biggest Muslimwith Indonesia through political and economic instability, the nation needs to attracteconomy. Although many foreign investors in the energy and mining sectors have stuck

March, 9–18.Far Eastern Economic Review,30: 338–360; A. Stevenson-Yang & K. DeWoskin, 2005, China destroys the IP paradigm,Review,

Academy of ManagementC. Rufin, 2005, Government’s dilemma: The role of government in imitation and innovation,New York: Alfred A. Knopf; I. P. Mahmood &Hot Property: The Stealing of Ideas in an Age of Globalization,P. Choate, 2005,

April 21, A20;Wall Street Journal,India senses patent appeal; Local companies envision benefits in stronger protections,48(2): 2–5; E. Bellman, 2005,Research Technology Management,“Created in China” should speed its respect for IP rights,

May, 1; F. M. R. Armbrecht, 2005,Managing Intellectual Property,2005, Official questions China piracy claims,Sources:

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However, large networks can be difficult to manage.but also build flexibility.works, such as strategic alliances (see Chapter 9), firms can share resources and risks

By forming interorganizational net-strategic alliances to overcome those barriers.tions are often barriers, many firms, such as Toyota and General Motors, have turned to

Although government policy and regula-ernment and the multinational corporation.Management must also be concerned with the relationship between the host gov-

Western European countries than into Asian countries.U.S. firms may find it less difficult to expand their operations into Mexico, Canada, and

For example,better understood, and the product is easier to adapt to local markets.culture. In that case, there are likely to be fewer trade barriers, the laws and customs arecountries that are geographically close and have cultures similar to its own country’scoordination and integration are mitigated if the firm diversifies into more friendlyto firm and according to the abilities of each firm’s managers. The problems of central

The amount of international diversification that can be managed varies from firmabout a third will be international.”United States. Of the 500 stores Wal-Mart will open across all divisions this year [2005],reported that “More than 2,000 of Wal-Mart’s 5,700 stores are now located outside thegrowth from 2001 to 2005 has come from foreign-acquired retailers. One analystthat growth through international acquisitions; 40 percent of the international salesAmerica, especially in Mexico, and elsewhere in the world. The company has acceleratedAs Wal-Mart began to get the right mix of products, it became very successful in Latinto Wal-Mart’s corporate headquarters in Bentonville, Arkansas, order a fresh batch.”stores would radically discount them, “only to have automated inventory systems linkeding tackle—even clay pigeons for skeet shooting. To get rid of the clay pigeons, thealized. For example, its first Mexican stores carried ice skates, riding lawn mowers, fish-

Wal-Mart made significant mistakes in markets around the world as it internation-firm’s international operations.capital charges. In general, it is difficult to effectively implement, manage, and control aexpand into new countries. In addition, firms may encounter different labor costs andoften have to be redesigned and new distribution networks established when firms

Marketing programsfirm’s competitive advantages from one country to another.Institutional and cultural factors can present strong barriers to the transfer of a

tion of an international diversification strategy.to raw materials and different employee skill levels) greatly complicate the implementa-barriers, logistical costs, cultural diversity, and other differences by country (e.g., accesscosts of coordination between units and the distribution of products. Second, tradediversification. First, greater geographic dispersion across country borders increases the

There are several reasons for the limits to the positive effects of internationalpoint.179

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SUMMARY

and rivalry.

supporting industries; and patterns of firm strategy, structure,

nants: factors of production; demand conditions; related and

model suggests. The diamond model emphasizes four determi-

one or more home-country advantages, as Porter’s diamond

• International business-level strategies are usually grounded in

advantages of location.

on large investments; economies of scale and learning; and

benefits: increased market size; the opportunity to earn a return

• An international strategy usually attempts to capitalize on four

responsiveness.

less, and yet pressure is also increasing for local country

integration as the demand for commodities becomes border-

global transactions. Also, there is increased pressure for global

Internet and mobile telecommunications, which facilitates

labor. Emerging motivations focus on the combination of the

cycle, securing key resources, and having access to low-cost

sons. Traditional motives include extending the product life

because of traditional motivations, but also for emerging rea-

• The use of international strategies is increasing not only

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tures, locations, resources, etc.

and managers to focus their learning on specific markets, cul-

tial opportunities. Competing in regional markets allows firms

world, as opposed to viewing all markets in the world as poten-

• Some firms decide to compete only in certain regions of the

than once thought.

that the liability of foreignness is more difficult to overcome

costs of international strategies. Furthermore, research suggests

• The threat of wars and terrorist attacks increases the risks and

strategy with others.

multidomestic strategy with some product lines and a global

particularly those with many diverse products—use a

and local responsiveness. Many large multinational firms—

tional firms to consider the need for both global efficiency

challenge, environmental trends are causing many multina-

• Although the transnational strategy’s implementation is a

commitment.

requiring an integrated network and a culture of individual

gration and coordination. This strategy is difficult to implement,

order to emphasize both local responsiveness and global inte-

combine aspects of both multidomestic and global strategies in

controlled by the home office. A transnational strategy seeks to

boundaries; therefore, competitive strategy is centralized and

egy assumes more standardization of products across country

tailor its goods and services to the local market. A global strat-

business units operating in each country, so that each unit can

tic strategy decentralize strategic and operating decisions to the

country in which the firm competes. Firms using a multidomes-

A multidomestic strategy focuses on competition within each

• There are three types of international corporate-level strategies.

diversity, among other factors.

are exacerbated by trade barriers, logistical costs, and cultural

coordination and distribution costs, and management problems

expansion effectively. International diversification increases

• There are also limits to the ability to manage international

of a country’s currency).

governments) and economic risks (e.g., fluctuations in the value

tions. Among these are political risks (e.g., instability of national

• Several risks are involved with managing multinational opera-

greater innovation, help produce above-average returns.

greater economies of scope and learning, which, along with

tions are well managed. International diversification provides

effectively implemented and that the firm’s international opera-

average returns, but this assumes that the diversification is

• In general, international diversification is related to above-

sustain a large-scale R&D program.

tional diversification may generate the resources necessary to

returns from investments in innovation. In addition, interna-

because it provides a larger market to gain more and faster

• International diversification facilitates innovation in a firm,

they are successful, the greatest returns.

provide the advantages of maximum control by the firm and, if

wholly owned subsidiary. On the other hand, such subsidiaries

international market is through the establishment of a new

sitions. The most expensive and risky means of entering a new

and risks, but later may expand to strategic alliances and acqui-

begin with exporting or licensing, because of their lower costs

sidiaries, often referred to as greenfield ventures. Most firms

making acquisitions, and establishing new wholly owned sub-

including exporting, licensing, forming strategic alliances,

• Firms may enter international markets in one of several ways,

REVIEWQUESTIONS

what is the normal sequence of their use?

5. What five modes of international expansion are available, and

4. What environmental trends are affecting international strategy?

development?

How do they differ from each other? What factors lead to their

3. What are the three international corporate-level strategies?

strategies?

2. What four factors provide a basis for international business-level

to expand internationally?

1. What are the traditional and emerging motives that cause firms

8. What factors limit the positive outcomes of international

7. What are the risks of international diversification? What are the

a firm’s returns?

innovation? What is the effect of international diversification on

and innovation? How does international diversification affect

6. What is the relationship between international diversification

challenges of managing multinational firms?

expansion?

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EXERCISESEXPERIENTIAL

presentation of your analysis for presentation to the class.

equated with market share or with creating large firms. Prepare a

tries. Be careful to note that national advantage is not necessarily

firms from that country compete against rivals from other coun-

those advantages become transferred to the firm and help many

firms. However, when analyzing a country’s national advantage,

cies and competitive advantage exist at the level of individual

have obtained through your research. Note that core competen-

are explained in other chapters to analyze the information you

concepts of core competencies and competitive advantage that

countries and industries. Use the tools from Chapter 8 and the

offer a great deal of information that can be useful to examine

have Web sites thatFinancial TimesThe Economist

such as the U.S. CIA’s and State Department’s Web sites. In addi-

minants of national advantage. To do this, you may use sources

of the components of Porter’s diamond that deals with the deter-

Research your assigned country and industry with respect to each

Given your assignment, complete the following tasks.

United States Airframes Boeing

Sweden Paper products MoDo Paper

United Kingdom Whiskey William Grant & Sons

France Fashion clothing Guy Laroche

Switzerland Pharmaceuticals Novartis

Industries Co., Ltd.

Korea Shipbuilding Hyundai Heavy

Italy Footwear Bruno Magli

Japan Automobiles Toyota

Country Industry Firm

industry, and firm.

Each group will be assigned one of the following sets of country,

market.

cessfully compete in economies that are outside their domestic

order to understand why firms from that industry are able to suc-

ticular country and an advantaged industry from that country in

among themselves. In this exercise, your group will analyze a par-

lar nation’s advantage, and they can have an interactive effect

nents. Those elements can work to increase or decrease a particu-

Porter’s diamond captures many elements in each of its compo-

itive position in general. As with the five forces model in Chapter 2,

rivals from other countries may be starting from a weaker compet-

peting against firms from these countries in international markets,

strong national industries are based. It is logical that when com-

(Figure 8.2 in Chapter 8) captures the many factors on which

Michael Porter’s determinants of national advantage “diamond”

National Champions

or why not?

enced their occurrence? Were these changes successful? Why

market? If so, what were those changes and what factors influ-

terms of ownership and control of its stores after it entered the

• In each country, did Wal-Mart make any significant changes in

rior to the other entry modes?

this chapter, what made each country-specific entry mode supe-

• In your view and given your understanding of the materials in

entry mode it used to enter each of the five countries?

• What factors and conditions influenced Wal-Mart to select the

of the exercise.

questions with respect to each of the countries listed in Part One

Using materials in this chapter, prepare answers to the following

Part Two

• Mexico

• United Kingdom • Japan

• Germany • China

make this determination).

country market (use the entry modes discussed in this chapter to

should determine the entry mode Wal-Mart used to enter each

gather for each country. Most important, for each country, you

future in each country are examples of the information you should

and plans regarding how Wal-Mart intends to compete in the

revenue, market share, number of stores, competitive challenges,

operations in the countries appearing in the following list. Sales

information available to you to research Wal-Mart’s international

For this part of the exercise, use the Internet and other sources of

Part One

entry rather than a single mode of entry into international markets.

markets. This decision found Wal-Mart using multiple modes of

that different modes of entry should be used to enter different

sidering how to do this, Wal-Mart’s top-level managers decided

compete in economies other than its domestic U.S. market. In con-

petitive advantages would be critical to its efforts to effectively

been built. Executives felt that being able to duplicate these com-

petitive advantages on which Wal-Mart’s domestic success had

a highly efficient distribution system, and market power were com-

and profitability. A strong, cost-control-oriented corporate culture,

United States were critical to the firm’s long-term growth in sales

concluded that successful ventures into markets outside the

By the 1990s, top-level managers at Wal-Mart Stores (WMT) had

Wal-Mart Overseas Entry

tion, and the

/ St

rate

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ion

s:St

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orm

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260

NOTES

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NOWLEDGEK OBJECTIVES

Studying this chapter should provide you with the strategic management knowledge needed to:

1. Define cooperative strategies and explain why firmsuse them.

2. Define and discuss three types of strategic alliances.

3.describe their use.Name the business-level cooperative strategies and

4.strategies in diversified firms.Discuss the use of corporate-level cooperative

5.alliances as an international cooperative strategy.Understand the importance of cross-border strategic

6. Explain cooperative strategies’risks.

7.strategies.Describe two approaches used to manage cooperative

9Cha

pter

EPA

/TO

USS

AIN

T K

LUIT

ERS/

FILE

S/LA

ND

OV

Cooperative Strategy

France’s acquisition of KLM.The strategic alliance between Northwest and KLM is being disputed because of Air

Using Alliances to Build Greater Value

S

petitive challenge is IBM’s acquisition of the IT

others such as Siemens. An example of the com-

service providers such as IBM and the growth of

tive in recent years with the entry of global IT

well.The industry has become highly competi-

information technology (IT) services industry as

Strategic alliances are critical in Europe’s

lower.

mostly in mainland China, where costs are even

are manufactured by Taiwanese companies,

ufacturers. Now 80 percent of laptop computers

developing strategic alliances with foreign man-

order to compete in the industry and do so by

firms must find ways to keep their costs down in

leading Chinese PC company.Thus, computer

its laptops, and sold the business to Lenovo, the

IBM outsourced only 40 percent, lost money on

the manufacturing of their laptop computers.

Gateway, and Acer outsourced 100 percent of

the global markets for PCs. In 2004 Dell, Apple,

allowing them to compete more effectively in

manufacturers in order to hold down costs,

facturers have formed alliances with foreign

of necessity. For example, many computer manu-

of opportunities, others may form alliances out

developed strategic alliances to take advantage

While Fujitsu and Northwest apparently

harm Northwest.

doubt. Losing $1 billion annually could severely

arrangement, and the decision is currently in

Airlines has filed a statement opposing the

information with the new owner. American

the U.S. government to share the pricing

Northwest must obtain a new agreement from

ment. However, Air France acquired KLM and now

necessary to implement the code-share arrange-

airlines could share sensitive price information,

immunity from U.S. antitrust laws so that the two

alliance originally required Northwest to obtain

in additional revenue annually.To develop this

1989, provides each firm approximately $1 billion

Northwest Airlines’ alliance with KLM, formed in

important to other firms as well. For example,

Strategic alliances have been critically

Fujitsu.

means of populating international markets for

Thus, strategic alliances have served as a critical

Novell, Oracle, Sun Microsystems, and Veritas.

other firms such as Dell, EDS, Intel, Microsoft,

Europe. Fujitsu has developed alliances with

provide sales and support for Cisco products in

formed a strategic alliance with Cisco Systems to

as a standard for global solutions. In 1998, Fujitsu

and market Jasmine, a software product offered

alliance with Computer Associates to develop

tional markets. In 1997 Fujitsu formed a strategic

which then use them in products sold in interna-

These chips are sold to each of the parent firms,

design, develop, and sell flash memory chips.

formed a JV, Fujitsu AMD Semiconductor Ltd., to

Fujitsu and Advanced Micro Devices (AMD)

variety of information systems products. In 1993,

Computers.This JV manufactures and sells a

a joint venture (JV) named Fujitsu Siemens

companies’ European computer operations into

the partnership was the merger of the two

Siemens AG for over 20 years. One outcome of

Fujitsu has had a successful partnership with

major role in the firm’s success in recent years.

successful strategic alliances that have played a

For example, Fujitsu has developed a number of

manage them effectively, they help create value.

when firms form appropriate alliances and

many reasons for this, but the bottom line is that

ingredient in companies’ strategies.There are

trategic alliances have become an essential

/ St

rate

gic

Act

ion

s:St

rate

gy F

orm

ula

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PAR

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different strategic alliances as primary types of cooperative strategies. Next, we discussWe examine several topics in this chapter. First, we define and offer examples of

es above the fully competitive level.or more firms cooperate to increase prictwocollusive strategy,another type of cooperative strategy discussed in this chapter. In a

alliances are this chapter’s focus. Although not frequently used, collusive strategies areBecause they are the primary type of cooperative strategy used by firms, strategic

peting against competitors.firm learns how to cooperate with firms and use this cooperation as a means of com-This means that effective competition in the 21st-century landscape results when theand IBM as a means of obtaining IT services contracts with major European firms.alliances in Europe is fierce as evidenced by the acquisition of IT groups by Siemens

The competition for ITbusiness. We refer to this form of alliance as outsourcing.ers were a competitive necessity. They also drove IBM out of the laptop computerThe alliances formed by Dell and Hewlett Packard with foreign computer manufactur-customers; the companies’ cooperation created more value than their competition.tinations that the other does not, the alliance provided greater value to each airline’spetitors, as shown by the Northwest-KLM alliance. Because they each reach many des-shouldn’t be underestimated. Increasingly, cooperative strategies are formed by com-survival. The increasing importance of cooperative strategies as a growth engineeach year. Losing the alliance would greatly harm Northwest Airlines’ probability offirms a competitive advantage. They both derive substantial revenue from the alliancethrough a code-share arrangement with KLM since 1989 that appears to offer bothopportunities. Northwest Airlines has had a valuable nonequity strategic alliancechapter. Fujitsu forms equity-based alliances designed to take advantage of marketOpening Case examines several types of strategic alliances that we explore in thisestablish a favorable position relative to competition (see Chapters 2, 4, 5, and 8).to create value for a customer that exceeds the cost of providing that value and to

Thus, cooperating with other firms is another strategy that is usedshared objective.is a strategy in which firms work together to achieve acooperative strategy

competitive advantages.firms grow, and differentiate themselves from competitors to develop value-creating

tegies, which are another means by whichthis chapter, we examine cooperative stration, and strategic execution (internal growth) and acquisitions (external growth). InIn previous chapters, we examined important strategies for achieving growth, innova-

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(e.g., IT services).

firms, and they are critical to certain industries

alliances can be highly important to individual

market at $636 billion annually.Thus, strategic

Europe is $212 billion annually with the global

estimate that the market for IT services in

lucrative deals.The stakes are high, as analysts

and shut out competition from these potentially

In this way the services firms entered the market

Technology in a 10-year deal worth $3.7 billion.

companies. Siemens did the same with BBC

the deal, IBM will provide IT services to these

smaller Danish firm for $575 million. As a part of

group from the Danish firm Maersk and another

objective.together to achieve a sharedstrategy in which firms work

cooperative strategy

wwwbusinessweek.com, May 9.BusinessWeek Online,2005, Europe’s tech outfits hurry to the alter,www.wsj.com, June 9,: A. Reinhardt,Wall Street Journal Online,www.wsj.com, July 18; J. Dean & P. Tam, 2005, The laptop trail,Wall Street Journal Online,

KLM, 2005,2005, Strategic alliances, Fujitsu, www.fujitsu.com, July 23; S. Carey & D. Michaels, 2005, Northwest could lose its lucrative pact withSources:

A is a

strategies as well as how effective management of them can reduce those risks.strategic alliances. The chapter closes with discussion of the risks of using cooperativecorporate-level, international, and network cooperative strategies—most in the form ofuse. In succession, we then describe business-level (including collusive strategies),the extensive use of cooperative strategies in the global economy and reasons for this

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Strategic Alliances as a Primary Type

advantage.to develop a competitivetheir resources and capabilitiesdent company to share some offirms create a legally indepen-alliance in which two or more

is a strategicjoint venture

advantage.to create a competitiveresources and capabilitiesfirms combine some of theircooperative strategy in which

strategic alliance

Cement is big business in China as the government seeks to develop the infrastructureTung created a 50–50 joint venture called TH Group to invest in cement factories.

On Construction and entrepreneur Paul S. P.equally to its operations. In China, Shui Typically, partners in a joint venture own equal percentages and contribute

important source of competitive advantage for many firms.firms work together in a joint venture. As discussed in Chapter 3, tacit knowledge is an

such as those taking place when people from partneris learned through experiencesships and in transferring tacit knowledge. Because it can’t be codified, tacit knowledgecompetitive advantage. Joint ventures are effective in establishing long-term relation-independent company to share some of their resources and capabilities to develop a

is a strategic alliance in which two or more firms create a legallyjoint venture alliance, and nonequity strategic alliance.There are three major types of strategic alliances—joint venture, equity strategic

Three Types of Strategic Alliances

gic competitiveness.upgrade current competitive advantages while they develop new ones to maintain strate-changes and the global economy are examples of factors challenging firms to constantly

Rapid technologicalcompetitive advantages enhance the firm’s marketplace success.As previously discussed, particularly in Chapter 4,collaborative or relational advantage.

A competitive advantage developed through a cooperative strategy often is called asuccess.ties to create value are examples of cooperative behavior known to contribute to alliancetrustworthy, and consistently pursuing ways to combine partners’ resources and capabili-success requires cooperative behavior from all partners. Actively solving problems, being

In general, strategic alliancetrates on its primary business of defense modernization.Martin has formed over 250 alliances with firms in more than 30 countries as it concen-and Microsoft, among others. Focusing on developing advanced technologies, LockheedThis is evident in the Opening Case with Fujitsu forming alliances with AMD, Cisco, Dell,

etitors, establish multiple strategic alliances.Many firms, especially large global compcompetitive advantages.with partners to develop additional resources and capabilities as the foundation for newalliances allow firms to leverage their existing resources and capabilities while working

Strategicresources and capabilities to co-develop or distribute goods or services.them, strategic alliances involve firms with some degree of exchange and sharing of

Thus, as linkages betweenresources and capabilities to create a competitive advantage.is a cooperative strategy in which firms combine some of theirstrategic alliance

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as Wal-Mart, which have significant economies of scale.domestic company, it must compete with global firms, suchpeting in markets all over the world. While Sears is a

For example, Citibank is a global company com-making it difficult for firms to be successful without part-ity and uncertainty that characterize most global industries,the growth in types of cooperative strategies is the complex-

A key reason forcontrol over Sears’ credit card operation.refocus on its struggling retail business and gives Citibankagreement. This strategic alliance will give Sears a chance toannual performance payments from Citigroup under thethat it expects to receive approximately $200 million inwill save it more than $200 million a year. Sears also saidwith Sears’ 0 percent financing program, which Sears saidservicing agreement, Citigroup will absorb costs associatedfinancial institutions. Under a 10-year marketing-and-ment stores favored co-branding nonequity alliances withcontrol over its private-label credit cards, as most depart-lion. Sears was one of the few companies that still held totalsource its credit card business to Citigroup Inc. for $3 bil-example, the former Sears, Roebuck and Co. agreed to out-

Forments, distribution agreements, and supply contracts.alliance in many different forms, such as licensing agree-

However, firms today increasingly use this type ofknowledge between partners.

unsuitable for complex projects where success requires effective transfers of tacitand lower commitment levels characterizing nonequity strategic alliances make them

The relative informalityments than do joint ventures and equity strategic alliances.this, nonequity strategic alliances are less formal and demand fewer partner commit-separate independent company and therefore don’t take equity positions. Because ofate a competitive advantage. In this type of strategic alliance, firms do not establish acontractual relationship to share some of their unique resources and capabilities to cre-

is an alliance in which two or more firms develop anonequity strategic allianceIn 2004 SPDB and Citibank jointly launched their first credit card in China.alliance served “as a launchpad for Citigroup to enter the Chinese credit-card business.”20 percent of a bank in the PRC (People’s Republic of China). This equity strategicmaking it a significant shareholder, and was the first foreign bank to own more thanment totaling 5 percent. Citibank was allowed to raise that stake to almost 25 percent,Development Bank (SPDB), China’s ninth largest bank, through an initial equity invest-

For example, Citigroup Inc. formed a strategic alliance with Shanghai Pudongequity strategic alliances.such as those made by Japanese and U.S. companies in China, are completed throughand capabilities to create a competitive advantage. Many foreign direct investments,ent percentages of the company they have formed by combining some of their resources

is an alliance in which two or more firms own differ-equity strategic allianceAn intend to enter highly uncertain markets.substantially different from any they possess individually and when the partnersto combine their resources and capabilities to create a competitive advantage that isall, evidence suggests that a joint venture may be the optimal alliance when firms need

Over-Shui On the expertise necessary to develop a large, well-run cement company.(ports, highways, etc.) of the western provinces. Mr. Tung contributed the money and

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competitive advantage.capabilities to create atheir unique resources andrelationship to share some ofdevelop a contractualwhich two or more firmsalliance

nonequity strategic

competitive advantage.capabilities to create asome of their resources andthey have formed by combiningpercentages of the companymore firms own differentis an alliance in which two or

equity strategic allianceAn

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has helped them organize a North American tour.Cirque du Soleil’s alliance with Clear Channel Communications

time than in slow-cycle markets.situations, but for a shorter period oflonger period of time than in fast-cycle market

typically allowing them to be sustained for astandard-cycle markets,their long-term sustainability. Competitive advantages are moderately shielded from

the firm’s competitive advantages aren’t shielded from imitation, preventingmarkets,services are examples of industries characterized as slow-cycle markets. In conditions. Railroads and, historically, telecommunications, utilities, and financial

y. These markets are close to monopolisticperiods of time and where imitation is costlwhere the firm’s competitive advantages are shielded from imitation for relatively long

are marketsSlow-cycle markets5, on competitive rivalry and competitive dynamics.different objectives (see Table 9.1). We discussed these three market types in Chapter

cause firms using cooperative strategies to achieve slightlystandard-cycle marketsThe individually unique competitive conditions of slow-cycle, fast-cycle, and

to provide it).means reciprocity exists: Partners can ask them for help as well (and they are expectedital, they can call on their partners for help when needed. Of course, social capital

Because of the social cap-which they create social capital that affords them flexibility.Thus, firms attempt to develop a network portfolio of alliances indevelop trust.

build strategic flexibility. To do so means that they must select the right partners andcompetitive capabilities, gain access to resources, take advantage of opportunities, and

Essentially, firms form strategic alliances to reduce competition, enhance theirincreasingly between large alliances rather than between airlines.as a point of competition. In the global airline industry, for example, competition isindustries, alliance versus alliance is becoming more prominent than firm versus firm

In somesenior-level executives that alliances are a prime vehicle for firm growth.Supporting this expectation is the belief of manymore than 20 percent of revenue.

strategic alliances—are noticeable. In large firms, for example, alliances account forive strategies—particularly in the form ofThe effects of the greater use of cooperat

reaching them.objectives, which indicates that partnering with others will increase the probability ofmost (if not all) firms lack the full set of resources and capabilities needed to reach their

Moreover,and to enter markets more quickly.couldn’t develop by acting independentlyAmong other benefits, strategic alliances allow partners to create value that they

possibly acquire the technology fast enough, so partnering is essential.”ager noted that “you have to partner today or you will miss the next wave. You cannot

ion and development for these firms, a man-directly to the issue of technology acquisitcompanies stated that strategic alliances are central to their firms’ success.quite important to many companies. For example, surveyed executives of technologyCooperative strategies have become an integral part of the competitive landscape and are

Reasons Firms Develop Strategic Alliances

Clear Channel Communications to implement a 100-date tour of North Americanthe Medicare Modernization Act. Likewise, Cirque du Soleil formed a partnership withAetna and CVS to develop outreach programs to inform Medicare beneficiaries about

exemplified by the joint agreement betweenCase. Other forms of nonequity alliance are source most or all of their production of laptop computers as discussed in the Openingprimary or support activity from another firm. Dell and most other computer firms out-

is the purchase of a value-creatingoutsourcingDiscussed in Chapter 3,alliance.Typically, outsourcing commitments take the form of a nonequity strategic

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using current ones. Alliances between firms with current excess resources and capabilitiesfirms to constantly seek sources of new competitive advantages while creating value byconditions virtually preclude establishing long-lasting competitive advantages, forcing

Combined, theseFast-cycle markets tend to be unstable, unpredictable, and complex.Fast-Cycle Markets

competitive ones.helpful to firms making the transition from relatively sheltered markets to moreor unsustainable (in the case of a fast-cycle market). Cooperative strategies can beadvantages become partially sustainable (in the instance of a standard-cycle market)nize the future likelihood that they’ll encounter situations in which their competitive

Firms competing in slow-cycle markets should recog-complex products possible.tion, and the speed with which advancing technologies make quickly imitating even

for the quick dissemination of informa-rapid expansion of the Internet’s capabilities for several reasons, including the privatization of industries and economies, the

Slow-cycle markets are becoming rare in the 21st-century competitive landscapetheir strategic alliances overseas.consolidation continues, these companies are increasing their competitiveness throughexample, Nucor is investing in joint ventures in Brazil and Australia. While the globalEurope and Asia and are invested in ventures in South America and Australia. Forinternational partners and foreign markets. They have made strategic alliances ineffort to compete in a global steel market, these companies are focused on obtainingthe American steel industry has three major players: U.S. Steel, ISG, and Nucor. In anto establish franchises in new markets. For example, due to consolidating acquisitions,Firms in slow-cycle markets often use strategic alliances to enter restricted markets orSlow-Cycle Markets

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by Market TypeReasons for Strategic Alliances

• Learn new business techniques• Pool resources for very large capital projects• Meet competitive challenges from other competitors• Overcome trade barriers• Establish better economies of scale• Gain access to complementary resources

Standard-Cycle • Gain market power (reduce industry overcapacity)• Overcome uncertainty• Share risky R&D expenses• Form an industry technology standard• Maintain market leadership• Speed up new market entry

Fast-Cycle • Speed up development of new goods or services• Maintain market stability (e.g., establishing standards)• Establish a franchise in a new market

Slow-Cycle • Gain access to a restricted marketMarket Reason

TABLE 9.1

market power.first mover and operating in a significant number of markets, the firm has substantialpower early in its life. By 2005, Verizon Wireless provided services in 43 markets. As ato share the risk and enter more markets, thereby giving the venture greater marketless to offer wireless services in multiple U.S. markets in 2003. The partners were ableCommunications developed a joint venture with Vodafone Group named Verizon Wire-ing competitive level or to reduce its costs below the competitive level, or both. Verizondiscussed in Chapter 6, market power allows the firm to sell its product above the exist-

Companies also may cooperate in standard-cycle markets to gain market power. Asof scale.this standard-cycle market are often geared toward obtaining potential economiespurchase regional jets together. As these examples illustrate, alliances of companies inseeking to buy together as many as 100 planes. Alitalia and Air France are attempting tolines (Air Canada, Lufthansa, Austrian Airlines, and Scandinavian Airlines System) arehave taken this new buying power up to their biggest-ticket item: airplanes. Four air-estimates that its member airlines save up to 25 percent on joint orders. Some airlinesup to $200 million through joint purchasing, and Star Alliance (United and Lufthansa)(American Airlines and British Airways) say the alliance’s members have already savedjoint buying and let member carriers swap tips on pricing. Managers at OneworldSkyTeam (chaired by Delta and Air France) developed an internal Web site to speedto increase revenue, airlines have realized that they could also be used to reduce costs.complementary resources and capabilities. While airline alliances were originally set upscale (e.g., commercial aerospace), alliances are more likely to be made by partners withIn standard-cycle markets, which are often large and oriented toward economies ofStandard-Cycle Markets

manufactured for and sold by Dell.2004. Dell’s strategic partners incorporate much of this technology into the machinescritical for corporations, and thus made it a standard feature on all corporate laptops inable. Dell’s connection to customers also helped it to identify wireless technology as

orage more modular and more customiz-tomers’ requests, it has made servers and stmaintain its market leadership through responsiveness to customers. As a result of cus-and solidify a market position. Dell, also mentioned in the Opening Case, strives toIBM and Siemens’ actions exemplify the aggressiveness with which firms try to obtain

pean IT market in the Opening Case. In fact,learned about the highly competitive Eurofor applications that can be shifted to more flexible and cost-effective platforms. Weprovide significant business advantages or productivity gains, and aggressively looka handful of strategic partners to help drive down costs, integrate technologies thatcontinues to change rapidly as businesses are becoming more focused on selecting

The information technology (IT) industry is a fast-cycle market. The IT landscapenew markets.make an effective transition from the present to the future and also to gain rapid entry toand those with promising capabilities help companies competing in fast-cycle markets to

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in individual product markets.firm improve its performance

is used to help thestrategybusiness-level cooperative

egy details what the firm intends to do to gain a competitive advantage in specificmance in individual product markets. As discussed in Chapter 4, business-level strat-

is used to help the firm improve its perfor-business-level cooperative strategy

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StrategiesBusiness-Level Cooperative

capital developed between the partners.mentary to their capabilities. Part of this decision depends on the trust and socialpartners to have adequate knowledge to perform the task effectively and to be comple-much technological knowledge they should share with their partner. They need thelabor, thereby providing complementary capabilities. A critical issue for firms is howThe Taiwanese manufacturers have the technological capabilities and access to low costpercent of their laptop computer manufacturing rather than performing it in-house.explained in the Opening Case, Dell and several other computer firms outsource 100

vertical disintegrationand in the global competitive environments have led to Lenovo. As exemplified in the computer industry, these types of changes in industries

left the market, selling its laptop business tocompetitors. Subsequently, IBM essentially only about 40 percent of its manufacturing and could not control its costs as well as itsturing each unit, many of the computer firms turned to outsourcing. IBM outsourcedrequiring firms to control their costs. To substantially reduce the cost of their manufac-differentiation among them. As a result, price became a major competitive factor,arrangement. Personal computers had became more of a commodity product with littlecomputer firms with Taiwanese manufacturers represent this type of cooperative

The alliances formed by Dell, Hewlett-Packard, and otherenvironmental changes.environmental changes. In other words, they serve as a means of adaptation to the

Oftentimes, vertical complementary alliances are formed in reaction toFigure 9.2).ties from different stages of the value chain to create a competitive advantage (see

firms share their resources and capabili-vertical complementary strategic alliance,In a Vertical Complementary Strategic Alliance

horizontal (see Figure 9.1).There are two types of complementary strategic alliances—vertical andadvantages.

some of their resources and capabilities in complementary ways to develop competitiveare business-level alliances in which firms shareComplementary strategic alliances

Complementary Strategic Alliances

gies (see Figure 9.1).are four business-level cooperative strate-success in a specific product market. There

ners will create competitive advantages that it can’t create by itself and that will lead tobelieves that combining its resources and capabilities with those of one or more part-product markets. Thus, the firm forms a business-level cooperative strategy when it

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FIGURE 9.1

• Competition-reducing strategy

• Uncertainty-reducing strategy

• Competition response strategy

• Horizontal

• Vertical

• Complementary strategic alliances

advantages.ways to develop competitivecapabilities in complementarysome of their resources andalliances in which firms share

are business-levelalliancesComplementary strategic

on long-term product development and distribution opportunities.petitive advantage (see Figure 9.2). Commonly, firms use this type of alliance to focustheir resources and capabilities from the same stage of the value chain to create a com-

is an alliance in which firms share some ofhorizontal complementary strategic allianceHorizontal Complementary Strategic AllianceA

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Vertical and Horizontal Complementary Strategic Alliances

within it.an industry and the firmsbroader society that influencecomposed of dimensions in the

general environmentThe is

FIGURE 9.2

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ing Asia, Africa, and Central and Eastern Europe. The venture’s leading sponsor,institutions that do small and microbusiness lending in developing economies, target-opment funds, and foundations. ShoreCap invests capital in and advises local financialpartnership of organizations, including private businesses, financial institutions, devel-AMRO developed a venture called ShoreCap International involving a multisectorentering new product markets or emerging economies. For example, Dutch bank ABN

Also, they are used where uncertainty exists, such as inagainst risk and uncertainty.Particularly in fast-cycle markets, business-level strategic alliances are used to hedge

Uncertainty-Reducing Strategy

nership with Microsoft is designed to respond to these changes.undergoing rapid changes and current members must also act rapidly to adapt. The part-technology. Didier Lombard, CEO of France Telecom, stated that the telecom industry isFrance Telecom–Microsoft alliance will use the more powerful Wireless Fidelity (Wi-Fi)and mobile phone service using short-range wireless technology called Bluetooth. Theproject is in response to the announcement by BT Group PLC of a new hybrid fixed-lineas traditional cell phones or to access the Internet while at home or on the road. ThisMicrosoft technology that uses the Internet services. The phones will be designed to useinitial major projects. The first project is intended to develop a series of phones based on

France Telecom and Microsoft announced the formation of an alliance with tworespond to strategic rather than tactical actions.cult to reverse and expensive to operate, strategic alliances are primarily formed toused at the business level to respond to competitors’ attacks. Because they can be diffi-launch competitive responses to their competitors’ actions. Strategic alliances can beAs discussed in Chapter 5, competitors initiate competitive actions to attack rivals and

Competition Response Strategy

Mitsubishi to reduce the overall cost per unit of its own vehicles.manufacture new SUVs to be sold under Peugeot’s brand name. This alliance will helpand capacity utilization rates, Mitsubishi Motors developed an alliance with Peugeot tocovered up the defects rather than trying to correct them. To bolster its productivityand because of defects in its vehicles that were believed to result in fatalities. Managersmade to young and highly risky consumers, producing a large number of bad loans,during 2004–2005. This is because of major management blunders in which loans wereMitsubishi Motors experienced a decrease in global sales revenues by about 50 percentthe types of actions firms can legitimately take in the marketplace. For example,them. The partners may have different reputations in the market thus differentiatingSome firms are more effective in managing alliances and in deriving the benefits fromdifferent capabilities to leverage the complementary resources provided in the alliance.opportunities as a result of the alliance. Partners may learn at different rates and have

Frequently, the partners have differenttial reasons for the imbalance in benefits.partners but they rarely provide equal benefits to the partners. There are several poten-

Importantly, horizontal alliances may require equal investments of resources by thesuch as Hotmail and MSN Messenger.marketing. Microsoft provides access to its portal infrastructure and to online servicesCanada is responsible for content development and for customer support, billing, andthrough a new portal. Although they share the day-to-day operations of the portal, BellMicrosoft Canada entered into an alliance to provide Internet services in Canada

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reduce the level of competition.of IM users (23.6 million) and through this strategic agreement with AOL was able tothat they would integrate their IM services for consumers. MSN has the next largest groupover programs, which irritates many users. AOL and Microsoft quietly announced in 2003Yahoo! and MSN also operate IM services, but unlike e-mail, instant messages cannot cross

AOL dominates the instant-messaging (IM) business, with almost 60 million users.what could be destructive competitions in multiple product markets.Given what they know about each other as a competitor, firms choose not to engage inincluding how to deter the effects of their rival’s competitive attacks and responses.Rivals learn a great deal about each other when engaging in multimarket competition,firms avoid competitive attacks against those rivals they meet in multiple markets.”

is a form of tacit collusion “in whichmutual forbearanceDiscussed in Chapter 6,sion do not directly negotiate output and pricing decisions.above fully competitive prices. Unlike explicit collusion, firms engaging in tacit collu-

Tacit collusion results in below fully competitive production output andresponses.production and pricing decisions by observing each other’s competitive actions and

exists when several firms in an industry indirectly coordinate theirTacit collusioning the future of the companies charged and thus their current market values.Marsh McLennan, making the charges more intriguing. These are serious charges affect-were also accused in Spitzer’s charges. The CEO of AIG is the father of the CEO ofInsurance companies (e.g., American International Group—AIG) and other insurersand in colluding with insurers to rig the bid process for property and casualty insurance.charges accused the company of recommending clients go to favored insurance providersNew York, Eliot Spitzer, charged Marsh & McLennan with price fixing and collusion. Theguilty of noncompetitive actions. For instance, in 2004, the Attorney General for

Firms that use explicit collusion strategies may face litigation and may be foundin the United States and most developed economies (except in regulated industries).

Explicit collusion strategies are illegaling agreements in order to reduce competition.”“exists when firms directly negotiate production output and pric-Explicit collusion

of collusive strategies—explicit collusion and tacit collusion.of cooperative strategy. There are two typescollusive strategies are often an illegal type

Used to reduce competition, collusive strategies differ from strategic alliances in that

Competition-Reducing Strategy

the alliance reduces the uncertainty for both firms by combining their knowledge andand software needs. And, the alliance is clearly designed to develop new products soBy partnering with a firm in this industry, it is reducing its uncertainty about the marketbusiness. It wants to learn how it can develop software to satisfy needs in this industry.Microsoft. Microsoft is using the alliance to learn more about the telecom industry andresponse alliance for France Telecom but it is an uncertainty-reducing alliance forInterestingly, the alliance between France Telecom and Microsoft is a competitiontainty associated with developing new products or establishing a technology standard.

In other instances, firms form business-level strategic alliances to reduce the uncer-invests.in disadvantaged regions. It also hopes to reduce poverty in the regions where ittutions, ShoreBank’s goal is to reduce the risk of providing credit to smaller borrowersincluding the World Bank. Through this cooperative strategy with other financial insti-bank. It has a history of collaboration with financial institutions and other partners,ShoreBank Corporation, is a for-profit community development and environmental

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dation in the industry is reducing competition and prior approval was based on KLMbecause of KLM’s acquisition by Air France. Approval is required because the consoli-required from the European Union for the Northwest strategic alliance with KLMpartnership anchored by Delta and Air France. However, regulatory approval is nowinternational flights. It seems natural that all should join the SkyTeam alliance, thealliance to participate on joint domestic flights, and are cooperating with KLM onwith Northwest Airlines on transatlantic routes. Delta and Continental then joined theoriginally was only a partner to a minor partnership, the strategic alliance noted earlierruptcy (liquidation) has destabilized this partnership. KLM, based in The Netherlands,Chapter 11 bankruptcy proceedings in 2003 and continues to threaten Chapter 7 bank-United Airlines, Lufthansa, and All Nippon Airways. The fact that United enteredglobal partnerships for a number of years. The largest is Star Alliance, built around

ocking international mergers, has been formingindustry, in an effort to avoid laws blthey are often between rivalrous competitors. As noted earlier, the international airline

Horizontal complementary alliances are sometimes difficult to maintain becausevertical ones, have the greatest probability of creating a sustainable competitive advan-

Evidence suggests that complementary business-level strategic alliances, especiallynonsubstitutable (see Chapter 3).that is integrated through the alliance must be valuable, rare, imperfectly imitable, andcompetitive advantage using an alliance, the particular set of resources and capabilitiesto successful positions and performance in individual product markets. To develop aFirms use business-level strategies to develop competitive advantages that can contribute

Assessment of Business-Level Cooperative Strategies

competitiveness.must analyze the effect of a competition-reducing strategy on their performance and

Individual companiessometimes the regulation gets in the way of efficient markets.therefore, regulation is required to make sure that the balance is right, althoughcollaborate to meet global competition might lead to too much price fixing and,tacit ones. For example, regulation of pharmaceutical and biotech firms who must

However, this is challenging when evaluating collusive strategies, particularlycan collaborate to increase their competitiveness without violating established regula-

In general, governments in free-market economies need to determine how rivalsnant firms use a tacit collusion cooperative strategy.this industry suggest the possibility that the domi-

Prices above the competitive level inproduction.”branded cereals that are well above [the] costs ofdegree of concentration results in “prices for

Some believe that this highU.S. cereal market.of sales volume in the ready-to-eat segment of theQuaker) have accounted for as much as 80 percent

Four firms (Kellogg, General Mills, Post, andbecause of it tend to lead to tacit collusion.pendence and carefully observing competitorsbehavior toward them. Understanding this interde-and responses significantly affect competitors’interdependent and that their competitive actionsFirms in these industries recognize that they arecentrated industries, such as breakfast cereals.level competition-reducing strategy in highly con-

Tacit collusion tends to be used as a business-

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from four companies: Kellogg, General Mills, Post, and Quaker.Tacit collusion has ensured that the cereals in this aisle are overwhelmingly

itor the degree to which they are facilitating the creation of competitive advantages.using such competition-reducing business-level strategic alliances should carefully mon-

Companiespating firms rather than intended to obtain a competitive advantage.goals. Thus, such investment could be attributable to tacit collusion among the partici-as a follow-the-leader imitation approach may not have strong strategic or learningresearch suggests that firms following a foreign direct investment strategy using allianceshas the lowest probability of creating a sustainable competitive advantage. For example,

Of the four business-level cooperative strategies, the competition-reducing strategyrather than to attack competitors.alliances, which are formed to respond to competitors’ actions or reduce uncertaintyfocus on creating value than do competition-reducing and uncertainty-reducingstrategic alliances. The primary reason is that complementary alliances have a strongertemporary than those developed through complementary (both vertical and horizontal)uncertainty can also create competitive advantages, these advantages often are more

Although strategic alliances designed to respond to competition and to reduceline industry, the horizontal alliances formed are often unstable.is on the brink of further bankruptcy—and the high rivalry among partners in the air-not Air France. Because of the weak position of several of the airlines—United, for one,

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StrategiesCorporate-Level Cooperative

markets served, or both.terms of products offered orfirm to help it diversify in

is used by thetive strategycorporate-level coopera-

unique technological resources and capabilities.them. This “testing” process often characterizes alliances formed to combine firms’determine if the partners might benefit from a future merger or acquisition between

An alliance can be used as a way toterms of efforts to diversify partners’ operations.and permit greater flexibility inbecause they require fewer resource commitments

gic alliances are also attractive compared with mergers and particularly acquisitions,acquisitions, alliances become an especially appropriate option. Corporate-level strate-to diversify into markets in which the host nation’s government prevents mergers and

When a firm seeksoperations through a means other than a merger or an acquisition.Firms use diversifying alliances and synergistic alliances to grow and diversify their

strategies (see Figure 9.3).alliances, and franchising are the most commonly used corporate-level cooperativeproducts offered or markets served, or both. Diversifying alliances, synergistic

to help it diversify in terms ofcorporate-level cooperative strategyA firm uses a

Corporate-Level Cooperative Strategy

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FIGURE 9.3

• Franchising

• Diversifying alliances

• Synergistic alliances

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agreement between two legally independent companies whereby the franchisor grantsis a “contractualfranchiseresources and capabilities with partners (the franchisees).

uses a franchise as a contractual relationship to describe and control the sharing of itsis a corporate-level cooperative strategy in which a firm (the franchisor)Franchising

Franchising

the firms build their brand, if they closely control the quality of franchise operations.a much lesser extent. Because franchising helps firms grow faster, it simultaneously helpsfirms such as Wendy’s and Dunkin’ Donuts. By contrast, Outback has used franchises to

The Strategic Focus suggests that franchises are a major means of growth for someness, but in a synergistic way.complementary business-level alliance in that it diversifies both firms into a new busi-

Thus, a synergistic strategic alliance is different from aand Jsat in product markets.with a lucrative opportunity. In this case, the alliance diversifies PanAmSat geographicallyand against smaller regional providers that have only a few satellites. It also benefits Jsat

thus compete effectively in more marketsallow PanAmSat to send up more satellites and solo, PanAmSat expects to save more than $200 million. It is synergistic because it willcal and marketing expertise to the venture. By doing this as a joint venture rather thanits current customers off of its old satellite onto the new one and will also provide techni-ming and Internet services to the Eastern part of the United States. PanAmSat will move

provide high-definition video program-orbit a small satellite ($140 million in expenses) toPanAmSat developed a joint venture with Jsat Corporation to develop and send into

firms.alliances create synergy across multiple functions or multiple businesses between partnerthe business-level horizontal complementary strategic alliance, synergistic strategicshare some of their resources and capabilities to create economies of scope. Similar to

is a corporate-level cooperative strategy in which firmssynergistic strategic alliance

Synergistic Strategic Alliance

Devices. This alliance helped Fujitsu to refocus on its core businesses.flash memory business into a joint venture company controlled by Advanced Microple, Fujitsu, realizing that memory chips were becoming a financial burden, dumped itssolidate and then spin off diversified businesses that were performing poorly. For exam-Mitsubishi Electric, Hitachi, NEC, and Toshiba have been using joint ventures to con-

Japanese chipmakers Fujitsu,diversification in firms that have overdiversified.However, cooperative ventures are also used to reduceperformance by partner firms.

It should be noted that highly diverse networks of alliances can lead to poorerfor Shell, CNOOC’s bid was rejected by Unocal in favor of a bid by Chevron.acquire Unocal was discouraged by Shell, because Unocal was a competitor. Fortunately

perienced some tense times. CNOOC’s bid toventure began operating, the partners exsents CNOOC’s continuing diversification from its core upstream business. After thehas been mainly upstream, especially in offshore oil production. The joint venture repre-

CNOOC’s businessconsumption areas along the country’s coastal economic zones.”China. The goal of the venture is to produce products for “Guangdong and high-formed a joint venture to construct a $4.3 billion petrochemicals complex in southernareas. Shell Petrochemicals and China National Offshore Oil Corporation (CNOOC)share some of their resources and capabilities to diversify into new product or market

is a corporate-level cooperative strategy in which firmsdiversifying strategic alliance

Diversifying Strategic AllianceA

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partners (the franchisees).resources and capabilities withand control the sharing of itstual relationship to describeuses a franchise as a contrac-which a firm (the franchisor)level cooperative strategy in

is a corporate-Franchising

create economies of scope.resources and capabilities tofirms share some of theircooperative strategy in which

is a corporate-levelalliancesynergistic strategic

market areas.diversify into new product orresources and capabilities tofirms share some of theircooperative strategy in which

is a corporate-levelalliancediversifying strategicA

A

Focus Strategic

Franchising Finger Foods the American Way

strategy.franchising as its primary growthchised. Thus, Dunkin’ Donuts has usedDunkin’ Donuts outlets are fran-more significant, 78 percent of6,600 restaurants are franchised. Evensively. Just over 40 percent of Wendy’sused franchising much more exten-Wendy’s and Dunkin’ Donuts havefranchises. Other food chains such asits stores—less than 15 percent arecontrols and owns a large majority ofof growth, it has maintained tightback has used franchising as a meanssales of about $3.2 billion. While Out-locations in 20 countries, it has annualthe United States. With almost 1,200third-largest restaurant company intheir wholly-owned stores. For example, Outback Steakhouse International is the

Other restaurants have grown and succeeded using franchises to complementhas enjoyed recent success in the U.S. market.fried-chicken chain Pollo Campero SA is opening outlets in Shanghai.This same companyannually. Because of the huge potential market and KFC’s success, the Guatemala-basedChinese division of KFC’s parent firm,Yum! Brands, is earning over $1 billion sales revenuestores and departed Chinese markets. Still, the Chinese market can be lucrative.Thechallenging. A&W, Chili’s, and Dunkin’ Donuts tried and failed; they closed all their ChineseKFC.While these three franchisors have experienced success, the environment remainsSubway has become the third largest fast-food chain in China, behind McDonald’s and

meaning “person joins a group of other people.”jia meng,one was eventually developed:Franchises had a rough beginning in China.There was no word for the concept, but

Subway is able to help the Chinese accept its sandwiches, it has substantial opportunitiesAccording to Subway, China could handle well over 20,000 Subway outlets. Thus, ifHowever, each Subway has at least one item that is tailored to Chinese tastes.experienced problems because the Chinese do not like to eat with their hands.adapt to the cultural environment. For example, when Subway first entered China, itensure quality and no harm to their brand, they can also use franchisors to help themvaluable in international markets. While the firms have to maintain strong controls tosuch as McDonald’s, Subway, and Outback Steakhouse. Franchises have been especiallyFranchising has been used as a primary growth mode for many retail food operations

in China.

www.fastcompany.com, December.Fast Company,www. fortune.com, March 10; L. Tischler, 2004, It’s not about the doughnuts,Fortune,eats a sandwich,

www.fortune.com, June 1; C. Adler, 2005, How ChinaFortune,www.wsj.com, July 10; M. Overfelt, 2005, How we got started,Wall Street Journal Online,12; J. T. Areddy, 2005, Guatemala-based chicken chain plans to open stores in China,

www. wsj.com, JulyWall Street Journal Online,R. Gibson, 2005, Hedge fund urges Wendy’s to spin off coffee chain,Sources:

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to accept Subway’s sandwiches.Subway’s success in China is dependent on the ability of Chinese consumers

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level cooperative strategies. Thus, firms able to develop corporate-level cooperativebusinesses be managed? These questions are also answered as firms form corporate-strategy—in which businesses will the diversified firm compete, and how will those

We explain in Chapter 6 that firms answer two questions to form a corporate-levelalliances.is always properly distributed to those involved with the formation and use ofTo gain maximum value from this knowledge, firms should organize it and verify that itgies can also use them to develop useful knowledge about how to succeed in the future.other words, those involved with forming and using corporate-level cooperative strate-this being the case increases when successful alliance experiences are internalized. In

The likelihood ofthey effectively form and use corporate-level cooperative strategies.In spite of these costs, firms can create competitive advantages and value when

carefully monitor them.e-level ones, should be aware of alliance costs anderative strategies, especially corporat

and more complex, making them relatively more costly. Those forming and using coop-business-level, corporate-level cooperative strategies commonly are broader in scope

Compared with those at theCosts are incurred with each type of cooperative strategy.

Assessment of Corporate-Level Cooperative Strategies

Focus.franchising is a common strategy used by food chains as described in the Strategic

That is whyconsolidating independent companies through contractual relationships.has a dominant share, making it possible for a company to gain a large market share by

als; however, no firm or small set of firmssmall and medium-sized firms compete as rivsuch as retailing and commercial printing. In fragmented industries, a large number of

Franchising is a particularly attractive strategy to use in fragmented industries,itive advantage for franchisees operating in their local markets.strengthen the core company’s brand name, which is often the most important compet-

Working cooperatively, the franchisor and its franchisees find ways tofeedback to the franchisor regarding how their units could become more effective and

In return, franchisees should provideneeded to successfully compete at the local level.develop programs to transfer to the franchisees the knowledge and skills that are

A primary responsibility of the franchisor is tofranchisees) closely work together.In the most successful franchising strategy, the partners (the franchisor and the

States.Japan and 148 per million in Taiwan, far more than the 20 per million in the Unitedlike pantries for city dwellers short on space. There are 77 stores per million people inworldwide. 7-Eleven is especially popular in Asia, where convenience stores are more

hain now has over 25,000 franchised outletsdomestically and internationally. The cstore company 7-Eleven, Inc. has successfully used franchising in its expansion, bothfirms that use the franchising corporate-level cooperative strategy. The convenience

McDonald’s, Hilton International, and Krispy Kreme are well-known examples ofis an alternative to pursuing growth through mergers and acquisitions.

As with diversifying and synergistic strategic alliances, franchisingthe Strategic Focus.the number of food chains selling franchises in China in recent years as described ingrowth in emerging economies in the 21st century’s first two decades. This is shown byused in developed nations, franchising is expected to account for significant portions ofannual U.S. retail sales and compete in more than 75 industries. Already frequently

Franchising is a popular strategy; companies using it account for $1 trillion intrademarks in a given location for a specified period of time.”the right to the franchisee to sell the franchisor’s product or do business under its

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advantage.in the chapter, we further describe alliance management as a source of competitiveto advantages gained through the activities of individual cooperative strategies. Later

a competitive advantage that is in additionnonsubstitutable (see Chapter 3) develop strategies and manage them in ways that are valuable, rare, imperfectly imitable, and

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advantage.ties to create a competitiveof their resources and capabili-different nations combine somefirms with headquarters incooperative strategy in which

is an internationalalliancecross-border strategicA

their advantages to benefit from opportunities surfacing in the rapidly changing globalFirms also use cross-border alliances to help transform themselves or to better use

kets, sources of capital, legal procedures, and politics.more information about factors contributing to competitive success such as local mar-partners from an operational perspective, because the local partner has significantly

A cross-border strategic alliance can also be helpful to foreigninstitutional norms.ities of moving into a foreign country, such as lack of knowledge of the local culture orimportant, strategic alliances with local partners can help firms overcome certain liabil-

as in a cross-border alliance. Especiallythrough a partnership with a local firm, suchsify. Indeed, investment by foreign firms in these instances may be allowed onlydescribed in Chapter 8 may not be available to firms wishing to internationally diver-companies. Thus, in some countries, the full range of entry mode choices that weChina, for example, governmental policies reflect a strong preference to license localownership is an important national policy objective in some nations. In India andare additional reasons firms use cross-border alliances. As discussed in Chapter 8, local

Limited domestic growth opportunities and foreign government economic policiesconsiderable financial success over time.his seventh straight Tour de France in 2005. These alliances have helped Nike achievetwo world-famous athletes, golfer Tiger Woods and cyclist Lance Armstrong, who wonpopular soccer team, Manchester United. The firm also has alliance agreements withNike has alliance agreements with Brazilian soccer star Ronaldo and the world’s moststrategy in international markets, signing big-name athletes to sell shoes and apparel.because its U.S. business growth has slowed. It has sought to duplicate its marketing

ity marketing as it expands overseas, especiallyused its core competence with celebrNike hasfoundation of its domestic success to expand into international markets.

may form cross-border strategic alliances to leverage core competencies that are theThus, a firmions outperform domestic-only firms.In general, multinational corporat

There are several reasons for the increasing use of cross-border strategic alliances.develop a new microprocessor (described in the next Strategic Focus).technology as indicated by the international alliance among IBM, Sony, and Toshiba toactivity. While cross-border alliances can be complex, they may be necessary to improveFocus on franchising suggests, there is a significant amount of international cooperative

However, as the Strategicsome cases at the expense of mergers and acquisitions.tries, the number of cross-border alliances being completed continues to increase,

Taking place in virtually all indus-tive advantage against other, smaller oil companies.The new company is the 10th largest oil producer in the world, increasing its competi-combined BP’s Russian assets, a stake in Russian oil company Sidanco, with Tyumen.over $6 billion in a joint venture with Russian oil company Tyumen Oil. The venturebilities to create a competitive advantage. For example, British Petroleum (BP) investedfirms with headquarters in different nations combine some of their resources and capa-

is an international cooperative strategy in whichcross-border strategic alliance

International Cooperative Strategy

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age alliances.These points are explored later in our discussion of how to best man-alliance role.

as do precise specifications of each partner’sborder alliance contributes to success,deal from serving multiple markets. Careful and thorough study of a proposed cross-

However, as noted above, the firm hopes to learn a greatthan in the United States.as licensing fees for supplying its coffee, controlling costs abroad is more difficultof speed. While the company receives a percentage of the revenues and profits as wellThus, it agreed to a complex series of joint ventures in many countries in the interestexpand overseas, it wanted to do so quickly in order to keep its first-mover advantage.of the firms’ geographic diversification efforts. When Starbucks was looking toborder alliances may be a better way to learn this process, especially in the early stagesdiversify into international markets. Compared with mergers and acquisitions, cross-

s suggests the importance of learning how tooutperform domestic-only competitorHowever, the fact that firms competing internationally tend tostrategic alliances.

In general, cross-border alliances are more complex and risky than domesticlogical capabilities.sumer electronics market. The microprocessor takes advantage of IBM’s strong techno-high-definition televisions that they are developing, using their knowledge of the con-the Strategic Focus, Sony and Toshiba plan to use the new “Cell” microprocessor inalliance. This is the case in the alliance among IBM, Sony, and Toshiba. As explained ineconomy. In these cases, the firm leverages its distinctive capabilities through the

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to achieve shared objectives.to form multiple partnershipsegy wherein several firms agree

is a cooperative strat-strategynetwork cooperative

Having access to multiple collaborations increases the“to their partners’ partners.”An important advantage of a network cooperative strategy is that firms gain access

Alliance Network Types

focal firm’s performance over time.work whenever they need aid. Such expectations can become a burden and reduce the

firms in the network are expected to help other firms in the net-keiretsus,as Japanese precluding the development of alliances with others. In certain types of networks, suchdisadvantages to participating in networks as a firm can be locked in to its partners,

However, there are21st-century success of both supplier and buyer partners involved.work cooperative strategies will make these strategies important contributors to the

The research evidence suggests that the positive financial effects of net-innovative.better innovation. As a result, firms involved in networks of alliances tend to be moretiple sources. They can use these heterogeneous knowledge sets to produce more andin Chapter 11). Firms involved in networks gain information and knowledge from mul-

(discussed furtherstrategic center firmas does having a productive will be successful,their resources and capabilities make it more likely that a network cooperative strategy

actions among partners while sharingEffective social relationships and interIsland.as in California’s Silicon Valley and Singapore’s Silicongraphically clustered firms,

ly effective when it is formed by geo-A network cooperative strategy is particularseveral firms agree to form multiple partnerships to achieve shared objectives.

is a cooperative strategy whereinnetwork cooperative strategy multiple networks.alliances with individual companies, a growing number of firms are joining forces inIncreasingly, firms use several cooperative strategies. In addition to forming their own

Network Cooperative Strategy

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for Innovation and Its UseForming an International Alliance Network

broadband networks, requiring new software as well. Intel chips can carry out twowere developed for data processing.The Cell was designed for communicating over

This new microprocessor has a different technical base from Intel’s chips, whichin 2006 (which will compete with its collaborator, Sony).applications for the Cell. Its first product using the Cell will be a high-definition televisioncomputer entertainment system powered by the Cell.Toshiba expects to have diverseSony Computer Entertainment Inc. announced plans to introduce a new generation

Sony plans to launch home servers and high-definition television systems in 2006.various industrial systems.”rich broadband applications from consumer electronics [to] home entertainment throughIBM, Sony Group, and Toshiba . . . sustaining a whole spectrum of advanced information-first development of the Cell project, initiated with the aspirations by the joint team ofcorporate vice president of Toshiba Corporation, stated that “we are very proud . . . [of ] thea doorway, a new chapter in computer science is about to begin.” Masashi Muromachi,Ken Kutaragi, executive deputy president and COO for Sony, stated that “With Cell openingour collaboration . . . that portends a new era in graphics and multi-media performance.”

William Zeitler, senior vice president for IBM, stated that “we see tangible results ofsupercomputers.Cell in a broad range of new products including digital televisions, home servers, andToshiba's advanced semiconductor technology. Sony and Toshiba expect to use theattributes of IBM's sophisticated servers, Sony's computer entertainment systems, anddescribe it as a "supercomputer on a chip." The Cell incorporates many of the positiveespecially suited for entertainment and media applications. The alliance partnersAustin, Texas, since 2001. The Cell's ultra-high-speed communication capabilities areEngineers from the three companies have been collaborating at a joint design center inthrough in architectural design, resulting in a small but powerful microprocessor.new products using the Cell from their alliance. The Cell represents a major break-development of a microprocessor called the Cell and the introduction to the market ofIn 2005, IBM, Sony (and Sony Computer Entertainment Inc.), and Toshiba announced the

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be at the forefront in the development of new technologies and new products.which includes a growing array of products today.Thus, alliance networks have helped IBMchips developed will allow IBM to compete in almost all markets requiring semiconductors,by IBM in the first years of this century to stay on the cutting edge of technology.The newtechnologies. These technological developments are the result of a new strategy launchedbenefited by participating in the network of alliances in the development of the newbut is easier to program. In fact, the two chips are likely to be semi-competitors. IBM hasoped the game machine Xenon in 2005.The chip it uses does not match the Cell’s powerFor example, IBM is involved in an alliance with Microsoft and ATI Technologies that devel-involved in a network, providing it with exposure to many sets of technological knowledge.

IBM is involved in multiple alliances, as explained earlier in this chapter.Thus, it isa second, matching the world’s fastest supercomputers.A workstation with multiple Cell chips can perform 16 trillion mathematical operations insequences of instructions simultaneously, while the Cell can carry out ten simultaneously.

December 1.February 7; D. Hug, 2004, IBM, Sony, SCEI, and Toshiba to unveil next-generation cell processor, JCNN News Summaries,Sony Computer Entertainment Inc., and Toshiba disclose key details of the Cell chip, Press Release, Sony Corporation,

February 7, B1; 2005, IBM, Sony,Wall Street Journal,2005, Sony, IBM, Toshiba to offer first peek of “Cell” chip design,February 14, 80; D. Clark & R. A. Guth,Business Week,S. Hamm, 2005, IBM discovers the power of one,Sources:

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engaged in such joint network relationships.Small firms also build credibility faster by beingup firms to accomplish this goal.

tries as software and pharmaceuticals create networks of smaller entrepreneurial start-Often, large firms in such indus-of new ideas.explorationthat their purpose is often

creating product innovations and subsequent successful market entries, demonstratingThus, dynamic alliance networks are primarily used to stimulate rapid, value-

success.pany can offer a broader range of IT solutions and improve the probability of marketand thus providing stamina and flexibility for customers. Through partnerships, a com-By partnering, companies play on “teams,” fielding the best players at every positionof its alliances with more than 90,000 business partners helped shape its turnaround.successful partnering. After IBM’s “near-death experience” in the early 1990s, the power

than 40 percent of their revenue throughindependent software vendors earn more strategic partnerships can make the difference between success and failure. As such,company to maintain success over time. Therefore, the ability to develop and nurturepace of innovation in the information technology (IT) industry is too fast for any one

For instance, theons and short product life cycles.ized by frequent product innovatiare used in industries character-Dynamic alliance networksavailable between firms.

of the economies (scale and/or scope)exploitationThus, stable networks are built for while continuing to profit from operations in their core, relatively mature industry.ble alliance network, firms try to extend their competitive advantages to other settingsmature industries where demand is relatively constant and predictable. Through a sta-

is formed instable alliance network companies develop vary by industry conditions. A The alliance networks thatalliance network.cooperative strategy is commonly called an

The set of strategic alliance partnerships resulting from the use of a networkpetitiveness in the global economy.stimulates the development of product innovations that are so critical to strategic com-

In turn, development of new capabilities furtherresources and capabilities expands.likelihood that additional competitive advantages will be formed as the set of shared

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there are risks with alliances as well.adds to IBM’s technological capabilities. While these alliances appear to be successful,However, Microsoft and ATI gain value indirectly from IBM’s other alliance because itand another alliance with Microsoft and ATI Technologies to develop a different chip.alliances. IBM has alliances with Sony and Toshiba to develop the Cell microprocessorthe Strategic Focus, firms are increasingly participating in international networkthese firms survive in those markets early and to be competitive later. In fact, as noted in

Firms are regularly using strategic alliances to enter international markets; they help

reduces the likelihood that a firm will suffer from another’s opportunistic actions.Full awareness of what a partner wants in a cooperative strategy

quently, the opportunistic firm wants to acquire as much of its partner’s tacit knowl-when an alliance is based on a false perception of partner trustworthiness. Not infre-Opportunistic behaviors surface either when formal contracts fail to prevent them or

One cooperative strategy risk is that a partner may act opportunistically.Prominent cooperative strategy risks are shown in Figure 9.4.very costly.

tence and potential dishonesty, success can be elusive, and failure of the alliance can beis very important. Without managing areas of mistrust, including suspected incompe-tion industry, cooperation on a project between the main contractor and subcontractorsavoid cooperative strategy failure and to learn from failure if it occurs. In the construc-

Companies should work hard toto successfully develop future cooperative strategies.rategy’s failure to gain insights that can be usedneed to carefully study a cooperative st

a valuable learning experience. CompaniesAlthough failure is undesirable, it can be ship has potential complementarities and synergies, alliance success is elusive.many as 70 percent of them fail. This failure rate suggests that even when the partner-thirds of cooperative strategies have serious problems in their first two years and that as

In fact, evidence shows that two-Stated simply, many cooperative strategies fail.123

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edge as it can.127

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FIGURE 9.4

specific investments hostage• Holding alliance partner's complementary resources• Partners fail to use their

• Inadequate contracts• Misrepresentation of competencies

• Developing trusting monitoring• Detailed contracts and

relationships

Competitive Risks

• Creating value

Risk and Asset ManagementApproaches Desired Outcome

Although it was growing at three times the overall market rate in its core areas, theby Sony and Ericsson to become the top seller of multimedia mobile-phone handsets.

For example, Sony Ericsson Mobile Communications was a joint venture formedcooperative strategy and require significant resources to put into place and use.tems tend to stifle partners’ efforts to gain maximum value from their participation in aalliance’s competitive advantages. Thus, formal contracts and extensive monitoring sys-also often preclude positive responses to new opportunities that surface to use themonitoring systems may prevent partners from acting in their own best interests, theyexpensive, even though the approach is intended to reduce alliance costs. Althoughtion, in that writing detailed contracts and using extensive monitoring mechanisms isHowever, the costs to monitor the cooperative strategy are greater with cost minimiza-

Firms can successfully use both approaches to manage cooperative strategies.can be shared in multiple value-creating ways.behaviors, make it possible for partners to explore how their resources and capabilitiesmarketplace possibilities. Less formal contracts, with fewer constraints on partners’advantage of unexpected opportunities to learn from each other and to explore additionala partnership’s value-creation opportunities. In this case, partners are prepared to take

opportunity maximizationfocus of the second managerial approach—the cooperative strategy’s cost and to prevent opportunistic behavior by a partner. Theand how partner behavior is to be controlled. The goal of this approach is to minimize

cooperative strategy is to be monitoredwith its partners. These contracts specify how the management approach, the firm develops formal contractscost minimizationIn the

separate cooperative strategy management function.(see Figure 9.4). This is the case whether or not the firm has formed a

approaches to manage cooperative strategies—cost minimization and opportunityis in the hands of the right people at the right time. Firms use one of two primary

ively form and use cooperative strategiesthat what the firm knows about how to effectactivities, categorize knowledge learned from previous experiences, and make certain

Those responsible for managing the firm’s set of cooperative strategies coordinatewell managed.to a high-level executive or to a team improves the likelihood that the strategies will bezations in general, assigning managerial responsibility for a firm’s cooperative strategiesability to effectively manage cooperative strategies is unevenly distributed across organi-competitors may develop a competitive advantage in terms of this activity.managed. The firm that learns how to manage cooperative strategies better than its

Firms gain the most benefit from cooperative strategies when they are effectivelystrategies also shows that they are complex and challenging to manage successfully.

However, our study of cooperativenatives for firms competing in the global economy.As our discussion has shown, cooperative strategies represent important strategic alter-

parted ways.Disney and Pixar were unable to reach a new agreement and thusmore of its profits.

to sweeten its offer for a continued partnership, perhaps by allowing Pixar to keepdios during the negotiations for a new agreement, thereby putting pressure on Disneying profits in 2002. Pixar’s chairman, Steve Jobs, met with executives from other stu-

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have valuable benefits for all parties over time.Wal-Mart’s significant expansion plans, the social capital among these partners maygrant options for future joint activities. With China’s substantial growth potential andextended the relationship with further partnerships nor would they have agreed toof trust and social capital in prior relationships. Otherwise they would not havemalls to be anchored by Wal-Mart. This deal suggests that the partners have built a levelThe agreement among the parties allows CapitaLand an option to invest in 17 otherCo. (Szitic). The malls are managed by a joint venture between CapitaLand and Szitic.sion of Wal-Mart’s partnership with Shenzhen International Trust & Investmentownership in 15 malls in which Wal-Mart is the anchor. The deal represented an exten-

In 2005, CapitaLand Ltd. of Singapore signed a contract to acquire a 65 percentcontrol all alliance details.partner can be trusted reduces the firm’s concern about the inability to contractually

erative strategy in a formal contract. Confidence that itsall operational details of a coopOne reason is that it is impossible to specifystrategies both internally and externally.

thy can have a competitive advantage in terms of how they develop and use cooperativeThus, firms known to be trustwor-imperfectly imitable, and often nonsubstitutable.

Research indicates that trust can be a capability that is valuable, rare,behaviors.way to influence and control alliance partners’strategies. Trust may also be the most efficientmaximization approach to managing cooperativeseems to highlight the benefits of the opportunityners increases the likelihood of alliance success

Research showing that trust between part-described earlier in the chapter.these cases, the firms have built social capital asto create value are maximized. Essentially, inmonitoring costs are reduced and opportunitiesincreased difficulty. When trust exists, partners’part of cross-border alliances account for thetrade policies, cultures, laws, and politics that arecompared with domestic ones. Differences inestablish in international cooperative strategiestive basis, trust tends to be more difficult to

On a rela-relationship tends to be more stable.and the cooperativefirm’s alliance behaviors,

write detailed formal contracts to specify eachpartners trust each other, there is less need to

Whenbehavior from the firm’s alliance partner.nerable because of the expectations of positive

is a willingness to be vul-truststate,psychologother to act in the partnership’s best interests. Amaximization means that firms need to trust eachthe second management approach of opportunityis a part of the contract developed by firms using

The relative lack of detail and formality thatexplore opportunities.create difficulties for strategic alliances built toNorth Carolina. Such cost-cutting activities maysuch as research parks in Munich, Germany, anduted to costs from job cuts and closing units,venture posted a loss. Notably, the loss was attrib-

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participating in a cooperative strategy. The key is to build trust

minimize costs rather than to maximize opportunities by

to manage cooperative strategies. In this case, the interest is to

formal contracts and extensive monitoring systems are used

pursuit of opportunities between partners. Without trust,

exists, a cooperative strategy is managed to maximize the

with companies known for their trustworthiness. When trust

cooperative strategies. Firms recognize the value of partnering

• Trust is an increasingly important aspect of successful

which may be exploited.

specific investments made in conjunction with a partner,

Furthermore, a firm may be held hostage through asset-

competencies or fails to make them available, failure is likely.

developed appropriately, or if a partner misrepresents its

• Cooperative strategies aren’t risk free. If a contract is not

are primarily used as a tool of innovation.

where frequent product innovations occur, dynamic networks

advantages into new areas. In rapidly changing environments

industries, partners use stable networks to extend competitive

alliance network or a dynamic alliance network. Used in mature

Network cooperative strategies are used to form either a stable

resources and capabilities to form competitive advantages.

increases that partners will find unique ways to share their

other partnerships.” When this happens, the probability greatly

strategy is the firm’s opportunity to gain access “to its partner’s

tives. One of the primary benefits of a network cooperative

agree to form multiple partnerships to achieve shared objec-

• A network cooperative strategy is one wherein several firms

in the partnership.

ners aren’t fully aware of each other’s purpose for participating

riskier than their domestic counterparts, particularly when part-

mergers and acquisitions. Cross-border alliances tend to be

tic market and governmental restrictions on growth through

superiority of firms competing in markets outside their domes-

is used for several reasons, including the performance

• As an international cooperative strategy, a cross-border alliance

and capabilities will be shared with franchisees.

franchise as a contractual relationship to specify how resources

corporate-level cooperative strategy where the franchisor uses a

to develop synergy at the corporate level. Franchising is a

operational synergy, except that synergistic alliances are used

complementary alliance in which firms try to develop

scope. This alliance is similar to the business-level horizontal

firms share resources and capabilities to develop economies of

produce new products. Synergistic alliances are ones where

some of their resources and capabilities to enter new markets or

Through diversifying strategic alliances, firms agree to share

wants to pursue product and/or geographic diversification.

• Corporate-level cooperative strategies are used when the firm

alliances have the lowest probability of doing so.

ing a sustainable competitive advantage; competition-reducing

Complementary alliances have the highest probability of yield-

competitive environments (such as new product markets).

hedge against the risks created by the conditions of uncertain

its competitiveness. Uncertainty-reducing strategies are used to

while the firm marshals its resources and capabilities to improve

reducing strategies are used to avoid excessive competition

competitors’ actions, especially strategic ones. Competition-

Competition-responding strategies are formed to respond to

(vertical) or the same parts (horizontal) of the value chain.

their resources and capabilities to create value in different parts

and horizontal complementary alliances, companies combine

performance in individual product markets). Through vertical

level cooperative strategy is used to help the firm improve its

• There are four business-level cooperative strategies (a business-

for use of cooperative strategies.

power (standard-cycle) are among the reasons by market type

petitive advantage to another (fast-cycle), and to gain market

restricted markets (slow-cycle), to move quickly from one com-

fast-cycle, and standard-cycle market conditions. To enter

• The reasons firms use cooperative strategies vary by slow-cycle,

the competitive level.

potential competitive output level, thereby raising prices above

firms tacitly cooperate to reduce industry output below the

mutual forbearance, is a cooperative strategy through which

situations of explicit collusion exist. Tacit collusion, also called

With increasing globalization, fewer government-sanctioned

strategies are illegal unless sanctioned by government policies.

economies and certainly in developed ones, explicit collusive

strategies (with strategic alliances being the other). In many

• Collusive strategies are the second type of cooperative

form nonequity strategic alliances.

Outsourcing, discussed in Chapter 3, commonly occurs as firms

relationship) are the three basic types of strategic alliances.

strategic alliances (where firms cooperate through a contractual

different shares of a newly created venture), and nonequity

advantages), equity strategic alliances (where firms own

shares of a new venture that is intended to develop competitive

strategies. Joint ventures (where firms create and own equal

competitive advantage, are the primary form of cooperative

combine some of their resources and capabilities to create a

achieve a shared objective. Strategic alliances, in which firms

• A cooperative strategy is one in which firms work together to

and social capital.

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EXERCISESEXPERIENTIAL

the purposes supporting or driving each firm’s decision to partici-

In this part of the exercise, each team will present its assessment of

Part Four—Whole Class

when you are asked to do so.

prepared to present your group’s conclusions to the entire class

the purposes of each firm at the time the alliance was formed. Be

ing this alliance influence your thinking. Your task is to understand

reaching these conclusions, do not let any current events regard-

each firm with respect to participating in this strategic alliance. In

success? As a group, reach a consensus about the purposes of

differences? How important are those differences for the alliance’s

the partners? If so, what factors or conditions might create those

group. Do the purposes of participating in the alliance vary among

Your next task is to discuss your findings about each firm as a

Part Three—In Groups of Three

cuss your work with your group members.

which you think this alliance will be successful. Be prepared to dis-

of a successful alliance from Chapter 9 to evaluate the degree to

participate in this particular alliance, use the material on attributes

fied what you believe are the actual reasons your firm decided to

by completing the first part of this exercise. Once you have identi-

assess the appropriateness of their views given what you learned

the three firms. When reading the writers’ commentaries, carefully

ipate that different perspectives will be offered regarding each of

Because the business writers will have different perspectives, antic-

each firm decided to enter into a three-way cooperative strategy.

ber of discussions offered by business writers describing reasons

nonequity strategic alliance. You should be able to locate a num-

tions or reasons your assigned firm chose to participate in this

ing of the terms of the alliance, your task is to describe the motiva-

Motorola, Apple, or Cingular. Based on each person’s understand-

assigned one of the three partners to this alliance—either

As individuals within your three-person groups, you will be

Part Two—Individually

of the alliance to which the three partners agreed.

ing this part of the exercise, be certain to examine only the terms

ing the specifications of the ROKR mobile phone. While complet-

September 7, 2005. In addition, gain access to information detail-

nonequity strategic alliance at the time of its announcement on

to identify the terms of thisBusiness WeekWall Street Journal

Use the Internet and archives of business periodicals such as the

Part One—In Groups of Three

alliance to determine the purposes it serves for each firm.

plete this exercise, you will be asked to carefully examine this

between SBC Communications (SBC) and BellSouth (BLS). To com-

alliance is that Cingular itself is the product of a joint venture

phone in question is called the ROKR. A fascinating aspect of this

receiving downloads from Apple’s iTunes Web site. The mobile

role) a unique mobile phone (made by Motorola) that is capable of

and Cingular. The purpose of this alliance was to sell (Cingular’s

that involved three companies—Motorola (MOT), Apple (APPL),

In September 2005, a nonequity strategic alliance was announced

What’s in it for Apple?

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REVIEWQUESTIONS

aging cooperative strategies?

approach and the opportunity-maximization approach to man-

7. What are the differences between the cost-minimization

strategies?

6. What risks are firms likely to experience as they use cooperative

5. Why do firms use cross-border strategic alliances?

do firms use each one to create a competitive advantage?

4. What are the three corporate-level cooperative strategies? How

what are the differences among them?

3. What are the four business-level cooperative strategies and

gic alliances firms use to develop a competitive advantage?

2. What is a strategic alliance? What are the three types of strate-

petitive landscape?

strategy important to firms competing in the 21st-century com-

1. What is the definition of cooperative strategy and why is this

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NOTES

124–138; R. Vassolo, J. Anand, & T. B. Folta, 2004, Non-additivity in portfoliosJournal of World Business,small and medium sized enterprises,

Cooperative strategy, knowledge intensity and export performance of30: 58–77; A. Haahti, V. Madupu, U. Yavas, & E. Babakus, 2005,Review,

Academy of Managementrole of conversations and collective identity,6. C. Hardy, T. B. Lawrence, & D. Grant, 2005, Discourse and collaboration: The

10: 287–305.Journal of International Management,sourcing,contingency perspective on the depth and scope of international out-

5. M. J. Mol, P. Pauwels, P. Matthyssens, & L. Quintens, 2004, A technologicalMarch 12.

www.ibm.com,IBM Business Strategy Consulting,networked economy,4. J. Bowser, 2001, Strategic co-opetition: The value of relationships in the

10: 439–459.Organization Science,social exchange theory,technology alliances: The influence of transaction cost economics and

4. Is it a competition reducing strategy? If so, explain how it works.

tainty be reduced?

3. Is it an uncertainty reducing strategy? If so, how can the uncer-

petitors and what are they doing?

2. Is it a competition response strategy? If so, who are the com-

kind of complementary strategic alliance?

1. Is the above case a complementary strategic alliance? If so, what

presentation to the class as the board of directors:

questions using the concepts in Chapter 9, and make a brief

Based on this information, determine answers to the following

bring new therapies and new uses for existing therapies to market.

success in supporting and providing the evaluation required to

Excel Research has an established and proven track record of

patent extension can be given) for therapies in specific markets.

introducing new indications (FDA-approved uses for which limited

which specifies the objectives of acquiring new products and

continuing to grow by implementing its differentiation strategy,

both companies. Century, under your leadership, is committed to

ceuticals and Excel Research will provide enhanced benefits for

You expect that the strategic alliance between Century Pharma-

ized revenue during the patent period.

approval process can cost firms billions of dollars a year in unreal-

well understood combinations of basic chemicals. Delays in the

patent, generic firms can quickly enter the market, as the drugs are

eral years of the effective patent life. Upon expiration of the

marketing before they can exploit their patent. This can eat up sev-

series of tests to show that the drug is safe and effective prior to

further develop the drug target as an IND and then go through a

time, but unlike other inventors, the pharmaceutical firms have to

tion to apply for a patent. The patent life begins to run at that

In pharmaceuticals, as elsewhere, firms have one year from inven-

apeutic arenas with greater speed and at lower cost.

novel therapies to fill unmet needs in dermatology and other ther-

ticals and Excel Research can successfully work together to create

overseen by the FDA. As CEO, you believe that Century Pharmaceu-

new drugs (IND) that are not ready for clinical trials but still are

will also help with Century’s projects working on investigational

Food and Drug Administration (FDA) for new drug products. Excel

with the three-stage clinical trials process for its submissions to the

and bring new drug therapies to market. Excel will help Century

ciently and effectively navigate the regulatory approval process

specializes in working with pharmaceutical companies to effi-

independent, full-service research organization. Excel Research

that you are seeking a strategic alliance with Excel Research, an

Assume that you are the CEO of Century Pharmaceuticals, Inc., and

Alliance Strategy

alliance in the future and why?

rent status of this alliance, what is likely to happen with this

ing to participate in the alliance? In the class’s view, given the cur-

ing progress toward reaching the purposes it sought when decid-

reaching its anticipated success? Does each firm seem to be mak-

rent information about the status of this alliance. Is the alliance

hearing peers discuss their perspectives. Last, as a class, obtain cur-

to decide if your group would change its assessments in light of

inputs and what may have caused those differences. Be prepared

their assessments, discuss the differences among the groups’

pate in the strategic alliance. After all of the teams have presented

C. Young-Ybarra & M. Wiersema, 1999, Strategic flexibility in information26: 497–521;Strategic Management Journal,and incumbent alliances,

ship between interfirm collaboration and business sales in entrant3. K. Singh & W. Mitchell, 2005, Growth dynamics: The bidirectional relation-

Prentice-Hall, 339.2nd ed., Upper Saddle River, NJ:and Sustaining Competitive Advantage,

Gaining15(1): 93–101; J. B. Barney, 2002,Analysis & Strategic Management,Technologypetition policy in the United States and the European Union,

2. T. A. Hemphill, 2003, Cooperative strategy, technology innovation and com-39: 167–188.Journal of Management Studies,acquisitions,

tive capabilities: The preference for strategic alliances or mergers and19: 721–741; J. Hagedoorn & G. Dysters, 2002, External sources of innova-

Journal of Business Venturing,initial public offerings of Internet startups,1. S. J. Chang, 2004, Venture capital financing, strategic alliances, and the

40:

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recent animated features, and Pixar contributed 35 percent of Disney’s studio operat-company. All of Pixar’s films have done better at the box office than have Disney’shad significant bargaining power to strike another deal—with Disney or with anotherbox-office hits. However, Disney perceived risks in its partnership with Pixar. Pixar

all of which have beenA Bug’s Life,Toy Story, Monsters Inc.,features, including Pixar and Disney partnered to develop and market several computer-animated

with investments made to earn the returns.firm is at a relative disadvantage in terms of returns earned from the alliance compareding from the alliance. If the partner isn’t also making alliance-specific investments, theties to develop manufacturing equipment that can be used only to produce items com-while its partner does not. For example, the firm might commit resources and capabili-

A final risk is that one firm may make investments that are specific to the alliancecan cause misinterpretations of contractual terms or trust-based expectations.

In these instances, different cultures and languagesinternational cooperative strategy.ted to the cooperative strategy. This risk surfaces most commonly when firms form anresources and capabilities (such as its most sophisticated technologies) that it commit-

Another risk is that a firm won’t actually make available to its partners theeffective way to deal with this risk.when they are largely intangible) it is to share in the cooperative strategy may be anpartner to provide evidence that it does possess the resources and capabilities (eventions is an example of an intangible asset that partners often fail to deliver. Asking thebution is grounded in some of its intangible assets. Superior knowledge of local condi-The risk of competence misrepresentation is more common when the partner’s contri-

competencies it can bring to the partnership.discovered that a firm has misrepresented the

Some cooperative strategies fail when it isof 2006.remained in place until its expiration in Augustwas dissolved. However, the non-compete clausealliance for it to continue. Therefore, the alliancethat it was not gaining adequate value from thepartnership favored Apple and that HP decidedcharacteristics of the deal. It appears that thereported that Apple had control of the financialwould carry the HP logo. Furthermore, it wasfirms originally stated that iPods sold by HPand it had to use the Apple name, though theally. HP did not profit greatly from these salesued at over $4 billion in revenue to Apple annu-of iPod’s sales, slightly over 6 million units val-media strategy. HP accounted for about 5 percentthat selling the iPod no longer fits its digitalmarket. However, in July 2005, HP announcedare strong competitors in the personal computerstrategy. It was a surprise because the two firmsbecome the center of its digital entertainmentoutlets. HP explained that the iPod wouldHP to distribute Apple’s iPod machines to retailmade a surprise announcement of an alliance for

In January 2004, Hewlett Packard and Apple

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profiting enough from the arrangement.HP dissolved its alliance with Apple to distribute iPods because HP was not